SANDERSON FARMS, INC. - FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 |
For the quarterly period ended July 31, 2007
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
Commission file number 1-14977
(Exact name of registrant as specified in its charter)
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| Mississippi
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64-0615843 |
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| (State or other jurisdiction of
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(I.R.S. Employer |
| incorporation or organization)
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Identification No.) |
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| 127 Flynt Road, Laurel, Mississippi
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39443 |
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| (Address of principal executive offices)
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(Zip Code) |
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer
in Rule 12b-2 of the Exchange Act.
Large Accelerated filer o Acclerated filer x Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No x
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes o No o
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common
Stock, $1 Par Value Per Share: 20,140,258 shares outstanding as of July 31, 2007.
INDEX
SANDERSON FARMS, INC. AND SUBSIDIARIES
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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July 31, |
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October 31, |
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2007 |
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2006 |
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(Unaudited) |
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(Note 1) |
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(In thousands) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
17,697 |
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$ |
7,396 |
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Accounts receivable, net |
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52,128 |
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40,930 |
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Refundable income taxes |
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0 |
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14,402 |
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Inventories |
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134,980 |
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96,490 |
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Prepaid expenses and other current assets |
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15,496 |
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13,179 |
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Total current assets |
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220,301 |
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172,397 |
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Property, plant and equipment |
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660,023 |
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573,422 |
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Less accumulated depreciation |
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(279,054 |
) |
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(263,112 |
) |
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380,969 |
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310,310 |
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Other assets |
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2,113 |
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2,360 |
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Total assets |
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$ |
603,383 |
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$ |
485,067 |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
83,407 |
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$ |
55,081 |
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Current maturities of long-term debt |
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440 |
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4,433 |
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Total current liabilities |
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83,847 |
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59,514 |
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Long-term debt, less current maturities |
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121,933 |
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77,078 |
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Claims payable |
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3,200 |
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3,200 |
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Deferred income taxes |
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14,710 |
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16,935 |
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Stockholders’ equity: |
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Preferred Stock: |
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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 |
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Common Stock, $1 par value: authorized
100,000,000 shares; issued and
outstanding shares – 20,140,258 and
20,094,571 at July 31, 2007 and October
31, 2006, respectively |
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20,140 |
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20,095 |
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Paid-in capital |
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21,137 |
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17,181 |
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Retained earnings |
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338,416 |
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291,064 |
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Total stockholders’ equity |
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379,693 |
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328,340 |
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Total liabilities and stockholders’ equity |
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$ |
603,383 |
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$ |
485,067 |
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See notes to condensed consolidated financial statements.
3
SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended |
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Nine Months Ended |
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July 31, |
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July 31, |
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2007 |
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2006 |
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2007 |
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2006 |
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(In thousands, except per share data) |
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Net sales |
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$ |
394,753 |
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$ |
280,976 |
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$ |
1,047,935 |
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$ |
756,261 |
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Cost and expenses: |
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Cost of sales |
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329,315 |
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265,732 |
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916,752 |
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753,766 |
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Selling, general and administrative |
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18,058 |
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12,236 |
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43,513 |
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39,987 |
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347,373 |
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277,968 |
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960,265 |
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793,753 |
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OPERATING INCOME (LOSS) |
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47,380 |
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3,008 |
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87,670 |
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(37,492 |
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Other income (expense): |
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Interest income |
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86 |
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42 |
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193 |
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191 |
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Interest expense |
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(1,139 |
) |
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(1,089 |
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(3,625 |
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(1,725 |
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Other |
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13 |
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36 |
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24 |
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90 |
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(1,040 |
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(1,011 |
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(3,408 |
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(1,444 |
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INCOME (LOSS) BEFORE INCOME TAXES |
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46,340 |
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1,997 |
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84,262 |
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(38,936 |
) |
Income tax expense (benefit) |
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15,660 |
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(1,292 |
) |
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29,500 |
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(16,970 |
) |
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NET INCOME (LOSS) |
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$ |
30,680 |
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$ |
3,289 |
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$ |
54,762 |
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$ |
(21,966 |
) |
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Earnings (loss) per share: |
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Basic |
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$ |
1.52 |
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$ |
.16 |
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$ |
2.72 |
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$ |
(1.09 |
) |
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Diluted |
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$ |
1.51 |
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$ |
.16 |
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$ |
2.70 |
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$ |
(1.09 |
) |
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Dividends per share |
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$ |
.12 |
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$ |
.12 |
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$ |
.36 |
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$ |
.36 |
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Weighted average shares outstanding: |
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Basic |
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20,137 |
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20,067 |
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20,120 |
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20,066 |
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Diluted |
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20,366 |
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20,151 |
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20,271 |
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20,066 |
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See notes to condensed consolidated financial statements.
4
SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Nine Months Ended |
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July 31, |
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2007 |
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2006 |
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(In thousands) |
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Operating activities |
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Net income (loss) |
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$ |
54,762 |
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$ |
(21,966 |
) |
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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24,843 |
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22,362 |
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Non-cash stock compensation |
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2,378 |
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1,905 |
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Change in assets and liabilities: |
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Accounts receivable, net |
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(11,198 |
) |
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(4,908 |
) |
Receivable from insurance companies |
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0 |
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|
11,945 |
|
Inventories |
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(38,490 |
) |
|
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(6,930 |
) |
Other assets |
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12,119 |
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(9,130 |
) |
Accounts payable, accrued expenses and other liabilities |
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23,628 |
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(23,346 |
) |
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Total adjustments |
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13,280 |
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(8,102 |
) |
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Net cash provided by (used in) operating activities |
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68,042 |
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(30,068 |
) |
Investing activities |
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Capital expenditures |
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(96,596 |
) |
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(63,923 |
) |
Net proceeds from sale of property and equipment |
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1,308 |
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|
653 |
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Net cash used in investing activities |
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(95,288 |
) |
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(63,270 |
) |
Financing activities |
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Principal payments on long-term debt |
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(4,138 |
) |
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(4,131 |
) |
Net borrowings from revolving line of credit |
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45,000 |
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|
20,000 |
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Proceeds from long-term borrowings |
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0 |
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|
50,000 |
|
Net proceeds from exercise of stock options and management share purchase plan |
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1,195 |
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|
997 |
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Tax benefit on exercised stock options |
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|
428 |
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|
27 |
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Dividends paid |
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|
(4,938 |
) |
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|
(4,917 |
) |
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Net cash provided by financing activities |
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|
37,547 |
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|
61,976 |
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Net change in cash and cash equivalents |
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10,301 |
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(31,362 |
) |
Cash and cash equivalents at beginning of period |
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|
7,396 |
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34,616 |
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Cash and cash equivalents at end of period |
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$ |
17,697 |
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$ |
3,254 |
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Supplemental disclosure of non-cash financing activity: |
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Dividends payable |
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$ |
(2,472 |
) |
|
$ |
(2,455 |
) |
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|
See notes to condensed consolidated financial statements.
5
SANDERSON FARMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
July 31, 2007
NOTE 1 — BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles 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. generally accepted accounting
principles 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 nine months ended July 31, 2007 are not necessarily
indicative of the results that may be expected for the year ending October 31, 2007.
The consolidated balance sheet at October 31, 2006 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. generally accepted accounting principles 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 the year ended October 31, 2006.
For
comparative purposes, certain amounts for the prior period
information presented have been reclassified to conform to current
period classification.
NOTE 2 — INVENTORIES
Inventories consisted of the following:
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July 31, |
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October 31, |
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2007 |
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2006 |
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(In thousands) |
|
Live poultry-broilers and breeders |
|
$ |
75,735 |
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$ |
53,011 |
|
Feed, eggs and other |
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|
15,884 |
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|
13,840 |
|
Processed poultry |
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|
28,262 |
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|
18,102 |
|
Processed food |
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|
9,547 |
|
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|
6,492 |
|
Packaging materials |
|
|
5,552 |
|
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|
5,045 |
|
|
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|
|
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$ |
134,980 |
|
|
$ |
96,490 |
|
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NOTE 3 — STOCK COMPENSATION PLANS
Refer to Note 9 of our October 31, 2006 audited financial statements for further information on our
employee benefit plans and stock compensation plans. Total stock based compensation expense
applicable to the Company’s restricted stock grants for the nine months ended July 31, 2007 and
July 31, 2006 was $2,378,000 and $1,905,000, respectively.
During the nine months ended July 31, 2007, options were excercised for 45,687 shares of common
stock.
During the nine months ended July 31, 2007, participants in the Company’s Management Share Purchase
Plan purchased a total of 13,850 shares of restricted stock at an average price of $36.66 per share
and the Company issued 3,410 matching restricted shares.
During the quarter ended April 30, 2007, the Company granted 15,000 shares of restricted stock to
certain directors. The restricted stock had a grant date fair value of $33.70 per share and vests
three years from the date of grant.
During the quarter ended January 31, 2007, the Company entered into performance share agreements
that grant certain officers and key employees the right to receive a target number of 106,000
shares of the Company’s common stock, subject to the Company’s achievement of certain performance
measures. The aggregate target number of shares specified in performance share agreements
outstanding as of July 31, 2007 totaled 179,950. No compensation cost was recognized for
performance shares during the three and nine months ended July 31, 2007 because achievement of the
applicable performance measures is not considered probable.
NOTE 4 — EARNINGS PER SHARE
Basic net income (loss) per share was calculated by dividing net income (loss) by the
weighted-average number of common shares outstanding during the period. Diluted net income (loss)
per share was calculated by dividing net income (loss) by the weighted-average number of common
shares outstanding during the period plus the dilutive effects of stock options and restricted
stock outstanding. Restricted stock and employee stock options representing 84,023 common shares
were included in the calculation of diluted net income per share for the three months ended July
31, 2006. Restricted stock and employee stock options representing 81,935 common shares for the
nine months ended July 31, 2006 were excluded from the calculation of diluted net loss per share
for
6
the periods because the effect was antidilutive. Restricted stock and employee stock options
representing 229,148 and 151,029 common shares for the three and nine months ended July 31, 2007
are included in the calculation of diluted net income per share, respectively.
NOTE 5 — NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued Interpretation No. 48, Accounting for “Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109.” Interpretation 48 clarifies the accounting for
uncertainty in income taxes recognized in a company’s financial statements in accordance with
Statement No. 109 and prescribes a recognition threshold and measurement attribute for financial
statement disclosure of tax positions taken or expected to be taken on a tax return. Additionally,
Interpretation No. 48 provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. Interpretation 48 is effective for
fiscal years beginning after December 15, 2006, with early adoption permitted. The Company is
currently evaluating the impact the adoption of Interpretation 48 will have on the Company’s
consolidated financial position, results of operations and cash flows.
NOTE 6 — OTHER MATTERS
On June 6, 2006, Annie Collins, a former employee of the processing division subsidiary, on behalf
of herself and as representative of “a class of individuals who are similarly situated and who have
suffered the same or similar damages” filed a complaint against the Company’s processing and
production subsidiaries in the United States District Court for the Eastern District of Louisiana.
Plaintiffs allege that the Company’s subsidiaries violated the Fair Labor Standards Act by failing
to pay plaintiffs and other hourly employees for the time spent donning and doffing protective and
sanitary clothing and performing other alleged compensable activities, and that “Sanderson
automatically deducted thirty minutes from each worker’s workday for a meal break regardless of the
actual time spent on break.” Plaintiffs also allege that they were not paid overtime wages at the
legal rate. Plaintiffs seek unpaid wages, liquidated damages and injunctive relief.
On July 31, 2006, following various procedural motions, the Company filed its Answer to the
plaintiffs’ Complaint.
On July 20, 2006, ten current and former employees of the processing division subsidiary filed an
action in the United States District Court for the Eastern District of Louisiana nearly identical
to the one described above. Approximately 3,700 individuals purportedly have given their consent to
be a party plaintiff to this and the aforementioned actions. Since the filing of these two
complaints, six other substantially similar lawsuits were filed in the United States District Courts
for the Jackson and Hattiesburg divisions of the Southern District of Mississippi. Unlike the two
previous suits referenced above filed in Louisiana (which suits were consolidated into one action),
these Complaints are specific to individual processing locations of the subsidiary Corporation.
On March 26, 2007, the parties to the Louisiana action filed a Joint Motion for Preliminary
Approval of Collection Action Settlement and Appointment of Plaintiff’s Counsel as Class Counsel.
Although not a party to the Louisiana matter, the plaintiffs in the Mississippi suits agreed to be
bound by the settlement reached in the Louisiana suit, and the Mississippi suits have been stayed
pending approval of the settlement motion before the Louisiana Court. On April 11, 2007, the Court
denied the joint motion on two grounds: (1) The motion was premature because no motion to certify a
collective action had been filed in the case, and (2) certain contingencies contained in the
settlement agreement gave rise to concerns about whether the settlement agreement was in accordance
with the Fair Labor Standards Act. The parties filed a Joint Motion for Reconsideration of this
order of the Court, which was granted in part and denied in part by order dated May 3, 2007. In the
order, the Court stated it would permit notice to the class to proceed. The Court also stated that
if certain contingencies agreed to by the parties in the settlement agreement concerning class
participation are met, it will consider the reasonableness of the proposed settlement at a fairness
hearing. This hearing will take place after the August 1, 2007 deadline the Court has set for class
members to opt in to the lawsuit. The parties have agreed to proceed in this manner, and the Court
has authorized the distribution of notice to the class. At the joint request of the parties, the
Court has extended the August 1, 2007 deadline for class members to opt into the lawsuits to
September 14, 2007. Any fairness hearing would be held on a date following this new deadline.
The Company is also involved in various other claims and litigation incidental to its business.
Although the outcome of the matters referred to in the preceding sentence cannot be determined with
certainty, management, upon the advice of counsel, is of the opinion that the final outcome should
not have a material effect on the Company’s consolidated results of operation 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. A determination of the amount of reserves required, if any, for these
matters is made after considerable analysis of each individual case. Because the outcome of these
cases cannot be determined with any certainty, no estimate of the possible loss or range of loss
resulting
7
from the cases can be made. At this time, the Company has not accrued any reserve for
any of these matters. Future reserves may be required if losses are deemed 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 or
changes to reserves or by accruals of losses to reflect any adverse determinations of these legal
proceedings.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Sanderson Farms, Inc.
We have reviewed the condensed consolidated balance sheet of Sanderson Farms, Inc. and subsidiaries
as of July 31, 2007, and the related condensed consolidated statements of operations and for the
three month and nine month periods ended July 31, 2007 and 2006, and the condensed consolidated statements
of cash flows for the nine-month periods ended July 31, 2007 and 2006. These financial statements
are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit conducted in accordance
with the standards of the Public Company Accounting Oversight Board, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the
condensed consolidated financial statements referred to above for them to be in conformity with
U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Sanderson Farms, Inc. and
subsidiaries as of October 31, 2006, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for the year then ended not presented herein, and in our
report dated December 27, 2006, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of October 31, 2006, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
New Orleans, Louisiana
August 24, 2007
8
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following Discussion and Analysis 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, 2006.
This Quarterly Report, and other periodic reports filed by the Company under the Securities
Exchange Act of 1934, and other written or oral statements made by it or on its behalf, may include
forward-looking statements, which 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 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, either of which may affect the
value of inventories, the collectability of accounts receivable or the financial integrity of
customers.
(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.
(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.
(9) Changes in the availability and cost of labor and growers.
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 quarterly 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.
The Company’s poultry operations are integrated through its management of all functions
relative to the production of its chicken products, including hatching egg production, hatching,
feed manufacturing, raising chickens to marketable age (“grow out”), processing, and marketing.
Consistent with the poultry industry, the Company’s profitability is substantially impacted 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.
9
The Company’s processed and prepared foods product line includes over 100 institutional and
consumer packaged food items that it sells nationally and regionally, primarily to distributors,
food service establishments and retailers. A majority of the prepared food items are made to the
specifications of food service users.
On January 12, 2006, the Company announced that sites in Waco and McLennan County, Texas had
been selected for the construction of a new poultry complex, consisting of a processing plant,
hatchery and wastewater treatment facility. The processing plant began processing chickens on
August 6, 2007, and is expected to reach full production of approximately 1.25 million head of
chickens per week during the summer of 2008.
On April 27, 2007, the Company amended its revolving credit facility to, among other things,
change the covenant requiring a minimum debt to total capitalization ratio to 55% during fiscal
2008 and 2009, increase the available credit to $225.0 million from $200.0 million and extend the
expiration date until April 1, 2012. As of July 31, 2007, the Company was in compliance with all
covenants and had $155.0 million available to borrow under the revolving credit facility.
EXECUTIVE OVERVIEW OF RESULTS
The Company’s financial results for the three and nine months ended July 31, 2007 reflect
significant improvement in market prices for the Company’s poultry products when compared to the
same periods during fiscal 2006, in part due to sluggish demand for poultry products during fiscal
2006 resulting from the appearance of H5N1 strain of avian flu in certain countries of Asia and
Europe. The improvement in financial performance during the first nine months of fiscal 2007 over
the first nine months of fiscal 2006 is also the result of improved efficiencies at the Company’s
poultry complexes in South Georgia and Collins, Mississippi and the negative impact during the
first quarter of fiscal 2006 on the Company’s Mississippi and Louisiana poultry operations due to
the effects of Hurricane Katrina. The South Georgia complex reported a significant increase in the
volume of poultry products sold during the nine months ended July 31, 2007 as compared to the same
period of fiscal 2006 due to the start-up of operations during fiscal 2006. The Collins,
Mississippi processing facility also increased the pounds of poultry products sold as a result of
the conversion of the plant in the first quarter of fiscal 2006 to the big bird deboning market
from the chill pack market. That facility was down for one week during the first quarter of fiscal
2006 to allow for the installation of certain equipment required for the conversion of the facility
to the big bird deboning market. The effect of the improvements in market prices for the Company’s
poultry products and increased efficiencies were partially offset by an increase in the cost of
feed grains during the three and nine months ended July 31, 2007 as compared to the three and nine
months ended July 31, 2006. Market prices for corn, which has been higher in part because of
increased demand from ethanol producers, and for soybean meal, which remains under pressure as a
result of farmers switching acres from soybeans to corn, are expected to remain volatile during
fiscal 2008. The Company expects feed grain costs to be approximately $124.7 million higher in
fiscal 2007 than during fiscal 2006. Poultry markets have remained strong during August, but
typically adjust to weaker demand following Labor Day.
RESULTS OF OPERATIONS
Net sales for the three months ended July 31, 2007 were $394.8 million as compared to $281.0
million for the three months ended July 31, 2006, an increase of $113.8 million or 40.5%. The
increase in net sales during the third quarter of fiscal 2007 reflects a 35.8% increase in the
pounds of prepared food products sold and an increase in the average sales price of poultry and
prepared food products sold of 39.7% and 6.0%, respectively. Market prices for boneless breasts,
tenders, wings and leg quarters were 24.0%, 41.7%, 66.1% and 49.5% higher during the third quarter
of fiscal 2007 as compared to the third quarter of fiscal 2006, respectively. A simple average of
the Georgia dock prices for whole birds also showed significant improvement, increasing by 16.9%.
The improvement in the overall market prices for poultry products resulted from a comparative
oversupply of poultry products during the third quarter of fiscal 2006 as compared to the third
quarter of fiscal 2007 due to sluggish demand for poultry products in the domestic and export
markets, which resulted in part from the appearance of the H5N1 strain of avian flu in certain
countries of Asia and Europe in 2006. Net sales at the prepared food plant increased $12.5
million, or 44.0% during the three months ended July 31, 2007 as compared to the three months ended
July 31, 2006 due primarily to an increase in sales of raw marinated poultry products.
Net sales for the first nine months of fiscal 2007 were $1,047.9 million as compared to $756.3
million for the first nine months of fiscal 2006, an increase of $291.6 million or 38.6%. The
increase in net sales during the first nine months of fiscal 2007 reflects a 10.5% increase in the
pounds of poultry products sold and a 31.8% increase in the pounds of prepared food products sold.
The additional pounds of poultry products sold can be attributed to the new complex in South
Georgia, which began operations during the fourth quarter of fiscal 2005 and was increasing
production during fiscal 2006, and increased pounds of products sold at the Collins, Mississippi
processing plant, which was down for one week during the first quarter of fiscal 2006 to allow for
the conversion to serve the big bird market from the chill pack market. The Company also sold
fewer pounds during the first quarter of fiscal 2006 due to the destruction of inventories during
Hurricane Katrina that would have been available for sale during the first quarter of fiscal 2006.
Market prices for boneless breasts, tenders, wings and leg quarters were 28.3%, 47.6%, 41.6% and
58.1% higher during the first nine months of fiscal 2007 as compared to the first nine months of
fiscal 2006, respectively, while a simple average of the Georgia dock
10
prices for whole birds
increased 8.6%. As discussed above, the improvement in the overall market prices for poultry
products resulted from a comparative oversupply of poultry products during the first nine months of
fiscal 2006 as compared to the first nine months of fiscal 2007 due to sluggish demand for poultry
products in the domestic and export markets, which resulted in part from the appearance of the H5N1
strain of avian flu in certain countries of Asia and Europe in 2006. Net sales of prepared food
products increased $31.3 million, or 36.4% during the first nine months of fiscal 2007 as compared
to the first nine months of fiscal 2006.
Cost of sales for the third quarter of fiscal 2007 were $329.3 million, an increase of $63.6
million, or 23.9% as compared to the same quarter of fiscal 2006. Cost of sales of the Company’s
poultry products increased $50.3 million, or 20.9%. The increase in the cost of sales of the
Company’s poultry products resulted from an increase in the average cost of feed in flocks sold of
40.2%. Feed costs as a percentage of costs of sales during the third quarter of fiscal 2007 were
44.6% as compared to 34.8% during the third quarter of fiscal 2006. A simple average of the
Company’s cost of corn and soybean meal during the third quarter of fiscal 2007 as compared to the
third quarter of fiscal 2006 reflects an increase of 68.4% and 12.7%, respectively. The Company’s
cost of sales was also higher during the quarter due to an increase in the pounds of prepared food
products sold of 35.8%. The Company’s prepared food products have a higher average cost of sales
per pound than the Company’s poultry products and include the increased cost of chicken, which is a
major raw material in the Company’s prepared food products. Cost of sales of prepared food
products increased $13.3 million or 52.4%.
Cost of sales for the nine months ended July 31, 2007, were $916.7 million, an increase of $163.0
million, or 21.6% as compared to the same nine months ended July 31, 2006. Cost of sales of the
Company’s poultry products increased $131.6 million, or 19.5%. The increase in the cost of sales
of the Company’s poultry products resulted from an increase in the pounds of poultry products sold
of 10.5% and an increase in the average cost of feed in flocks sold of 29.3%. These increases were
partially offset by increased efficiencies at the Company’s facilities in South Georgia and
Collins, Mississippi during the first nine months of 2007 and the negative impact of Hurricane
Katrina of $3.0 million on the Company’s Mississippi and Louisiana operations during the first
quarter of fiscal 2006. In addition, the impact of Hurricane Katrina resulted in fewer pounds sold
during the first quarter of fiscal 2006. As previously mentioned, the Company’s cost of sales was
negatively impacted by an increase in the cost of feed grains during the first nine months of
fiscal 2007 as compared to the same period during fiscal 2006. A simple average of the Company’s
cost of corn and soybean meal during the first nine months of fiscal 2007 as compared to the first
nine months during fiscal 2006 reflects an increase of 64.3% and 10.0%, respectively. Cost of
sales of prepared food products increased $31.4 million or 40.4%. The Company’s cost of sales of
prepared food products increased during the first nine months of fiscal 2007 as compared to the
same period during fiscal 2006 due to an increase in the pounds of prepared food products sold of
31.8% and an increase in the cost of chicken.
Selling, general and administrative costs increased $5.8 million during the third quarter of fiscal
2007 as compared to the same quarter during fiscal 2006 and increased $3.5 million for the first
nine months of fiscal 2007 as compared to the first nine months of fiscal 2006. The increase in
selling, general and administrative costs for the three and nine months ended July 31, 2007
resulted from increased start up costs incurred at the new complex in Waco, Texas and a $4.0
million accrual during the third fiscal quarter of 2007 for an anticipated contribution to the
Company’s ESOP, which the Company’s Board will consider during the fourth quarter of fiscal 2007.
Contributions to the ESOP are contingent upon profitability, and accordingly, no ESOP
contributions were made during fiscal 2006. The increase in start up costs during the three and
nine months ended July 31, 2007 and ESOP expenses during the third quarter of fiscal 2007 as
compared to the same periods during fiscal 2006, were partially offset by lower advertising
expenditures. Start up costs incurred at the Waco, Texas facilities during the three and nine
months ended July 31, 2007 were $2.4 and $3.7 million,
respectively, as compared to $147,000 and
$204,000 during the three and nine months ended July 31, 2006. The new Waco facility began
processing chickens on August 6, 2007, therefore, all costs of operating the new Waco, Texas
facilities during the fourth quarter of fiscal 2007, except for normal customer service
expenditures, will be included in cost of sales.
For the three months ended July 31, 2007, the Company reported an operating income of $47.4 million
as compared to an operating income of $3.0 million for the three months ended July 31, 2006. The
improvement of $44.4 million during the third quarter of fiscal 2007 resulted from the improved
market prices of poultry products and increased efficiencies at the Company’s poultry facilities in
South Georgia and Collins, Mississippi. These improvements were partially offset by substantial
increases in the costs of feed ingredients during the third quarter of fiscal 2007 as compared to
the third quarter during fiscal 2006. During the first nine months of fiscal 2007, operating
income was $87.7 million as compared to an operating loss of $37.5 million for the same period
during fiscal 2006. The improvement in operating income resulted from the improvement in market
prices for the Company’s poultry products, improved efficiencies at the Company’s poultry
facilities in South Georgia and Collins, Mississippi, and the negative impact during 2006 of
approximately $3.0 million from Hurricane Katrina on the Company’s Mississippi and Louisiana
facilities. The loss of approximately $3.0 million during fiscal 2006 from Hurricane Katrina resulted
from unrecognized lost profits and certain expenses that were the direct result of the Company’s
efforts to minimize the effect of Hurricane Katrina. These improvements during the first nine
months of fiscal 2007 as compared to the first nine months of fiscal 2006 were partially offset by
a substantial increase in the cost of feed grains.
Interest
expense during the three and nine months ended July 31, 2007 was
$1.1 million and $3.6 million,
respectively, as compared to $1.1 million and $1.7 million for the three and nine months ended July
31, 2006, respectively. The increase in interest expense resulted
11
from higher outstanding debt
during the first nine months of fiscal 2007 as compared to the first nine months of fiscal 2006,
partially offset by the capitalization of interest for the construction of the new complex in Waco,
Texas. The Company capitalized $2.1 million of interest costs for the new complex in Waco, Texas
during the first nine months of fiscal 2007 and capitalized $0.5 million of interest costs related
to the construction of the new general offices in Laurel, Mississippi and the new feed mill in
Collins, Mississippi during the first nine months of fiscal 2006. The Company expects interest
expense during the fourth quarter of fiscal 2007 to be higher than during the fourth quarter of
2006 as the construction of the new Waco facilities were substantially complete at July 31, 2007
and no further interest capitalization is anticipated to be charged to the new Waco facilities.
The Company’s effective tax rate for the three and nine months ended July 31, 2007 was 33.8% and
35.0%, respectively. The Company’s effective tax rate for the three and nine months ended July 31,
2006 was 64.7% and 43.6%, respectively. The 2007 effective tax rates differ from the statutory
federal rate due to state income taxes, certain nondeductible expenses for federal income tax
purposes, the benefit of certain federal income tax credits available resulting from impact of
Hurricane Katrina on the Company and the benefit of state tax credits related to various capital
improvements and expansions. The 2006 effective tax rate differs from the statutory federal tax
rate due to state income taxes and certain nondeductible expenses for federal income tax purposes
and the benefit of certain federal income tax credits available resulting from the impact of
Hurricane Katrina on the Company. The Company’s actual effective rate for the year ended October
31, 2007 may differ from the current estimates based on the results of operations for the remainder
of fiscal 2007 and final determination of the income tax credits available to the Company.
The Company’s net income for the third quarter of fiscal 2007 was $30.7 million or $1.51 per share
as compared to a net income for the third quarter of fiscal 2006 of $3.3 million, or $.16 per
share. The Company’s net income for the first nine months of fiscal 2007 was $54.8 million or
$2.70 per share as compared to a net loss of $22.0 million or $1.09 per share for the first nine
months of fiscal 2006.
Liquidity and Capital Resources
On January 12, 2006, Sanderson Farms, Inc. announced that sites in Waco and McLennan County, Texas
had been selected for construction of a new poultry processing plant, wastewater treatment facility
and hatchery. Sanderson Farms also expanded its feed mill in Robertson County, Texas to satisfy
the live production needs associated with the new complex. The Company invested $15.2 million in
these facilities during fiscal 2006, and expects to invest approximately $81.8 million in the new
complex and expansion of the Robertson County feedmill during fiscal 2007. Of that total for
fiscal 2007, $79.9 million has been spent through the third fiscal quarter.
The Company’s working capital at July 31, 2007 was $136.5 million and its current ratio was 2.6 to
1. This compares to working capital of $112.9 million and a current ratio of 2.9 to 1 as of
October 31, 2006. During the nine months ended July 31, 2007, the Company spent approximately $96.6
million on planned capital projects, of which $79.9 million pertains to the construction of the new
complex in Waco, Texas and expansion of the Robertson County, Texas feed mill.
The Company’s capital budget for fiscal 2007 was approximately $110.6 million at July 31, 2007, and
will be funded by cash on hand, internally generated working capital, cash flows from operations
and available credit. The Company had $155.0 million available under its revolving line of credit
at July 31, 2007. The fiscal 2007 capital budget includes approximately $3.5 million in operating
leases, $81.8 million to complete construction of the new poultry complex in Waco, Texas and
expansion of the Robertson County, Texas feed mill and $2.7 million to renovate the corporate
technical lab in Laurel, Mississippi. Without operating leases, the new poultry complex in Waco,
Texas, expansion of the feed mill in Robertson County, Texas and the new lab in Laurel,
Mississippi, the Company’s capital budget for fiscal 2007 would be $22.6 million.
On April 27, 2007, the Company amended its revolving credit facility to, among other things, change
the covenant requiring a minimum debt to total capitalization ratio to 55% during fiscal 2008 and
2009, increase the available credit to $225.0 million and extend the expiration date until April 1,
2012. As of July 31, 2007, the Company was in compliance with all covenants and had $155.0
million available to borrow under the revolving credit facility.
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.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting standards generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
12
statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from
these estimates and assumptions, and the differences could be material.
The Company’s Summary of Significant Accounting Policies, as described in Note 1 of the Notes
to the Consolidated Financial Statements that are filed with the Company’s latest report on Form
10-K, should be read in conjunction with this Management’s Discussion and Analysis of Financial
Condition and Results of Operations. Management believes that the critical accounting policies and
estimates that are material to the Company’s Consolidated Financial Statements are those described
below.
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. 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 food and poultry inventories and inventories of feed, eggs, medication and packaging
supplies are stated at the lower of cost (first-in, first-out method) or market. If market prices
for poultry or feed grains move substantially lower, the Company would record adjustments to write
down the carrying values of processed poultry and feed inventories to fair market value, which
would increase the Company’s costs of sales.
Live poultry inventories of broilers are stated at the lower of cost or market and breeders at
cost less accumulated amortization. The cost associated with broiler inventories, consisting
principally of chicks, feed, medicine and payments to the growers who raise the chicks for us, are
accumulated during the growing period. The cost associated with breeder inventories, consisting
principally of breeder chicks, feed, medicine and grower payments are accumulated during the
growing period. Capitalized breeder costs are then amortized over nine months using the
straight-line method. Mortality of broilers and breeders is charged to cost of sales as incurred.
If market prices for chickens, feed or medicine or if grower payments increase (or decrease) during
the period, the Company could have an increase (or decrease) in the market value of its inventory
as well as an increase (or decrease) in costs of sales. Should the Company decide that the nine
month amortization period used to amortize the breeder costs is no longer appropriate as a result
of operational changes, a shorter (or longer) amortization period could increase (or decrease) the
costs of sales recorded in future periods. High mortality from disease or extreme temperatures
would result in abnormal charges to cost of sales to write-down live poultry inventories.
Long-Lived Assets
Depreciable long-lived assets are primarily comprised of buildings and machinery and
equipment. Depreciation is provided by the straight-line method over the estimated useful lives,
which are 15 to 39 years for buildings and 3 to 12 years for machinery and equipment. An increase
or decrease in the estimated useful lives would result in changes to depreciation expense.
The Company continually evaluates the carrying value of its long-lived assets for events or
changes in circumstances that indicate that the carrying value may not be recoverable. As part of
this evaluation, 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 is
recognized to reduce the carrying value of the long-lived asset to the estimated fair value of the
asset. If the Company’s assumptions with respect to the future expected cash flows associated with
the use of long-lived assets currently recorded change, then the Company’s determination that no
impairment charges are necessary may change and result in the Company recording an impairment
charge in a future period. The Company did not identify any indicators of impairment during the
current fiscal period.
Accrued Self Insurance
Insurance expense for workers’ compensation benefits and employee-related health care benefits
are estimated using historical experience and actuarial estimates. 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 correct operating results. If historical experience proves not to be a good indicator
of future expenses, if management were to use different actuarial assumptions, or if there is a
negative trend in the Company’s claims history, there could be a significant increase or decrease
in cost of sales depending on whether these expenses increased or decreased, respectively.
13
Income Taxes
The Company determines its effective tax rate by estimating its permanent differences
resulting from differing treatment of items for financial and income tax purposes. The Company is
periodically audited by taxing authorities and considers any adjustments made as a result of the
audits in considering the tax expense. Any audit adjustments affecting permanent differences could
have an impact on the Company’s effective tax rate.
Contingencies
The Company is a party to a number of legal proceedings as discussed in Note 6 of our
unaudited quarterly condensed consolidated financial statements filed with this report. We
recognize the costs of legal defense in the periods incurred. A determination of the amount of
reserves required, if any, for these matters is made after considerable analysis of each individual
case. Because the outcome of these cases cannot be determined with any certainty, no estimate of
the possible loss or range of loss resulting from the cases can be made. At this time, the Company
has not accrued any reserve for any of these matters. Future reserves may be required if losses are
deemed 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 or changes to reserves or by accruals of losses to reflect any adverse
determination of these legal proceedings.
New Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48, Accounting for “Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109.” Interpretation 48 clarifies the accounting for
uncertainty in income taxes recognized in a company’s financial statements in accordance with
Statement No. 109 and prescribes a recognition threshold and measurement attribute for financial
statement disclosure of tax positions taken or expected to be taken on a tax return. Additionally,
Interpretation No. 48 provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. Interpretation 48 is effective for
fiscal years beginning after December 15, 2006, with early adoption permitted. The Company is
currently evaluating the impact the adoption of Interpretation 48 will have on the Company’s
consolidated financial position, results of operations and cash flows.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is a purchaser of certain commodities, primarily corn and soybean meal, for use in
manufacturing feed for its chickens. As a result, the Company’s earnings are affected by changes in
the price and availability of such feed ingredients. Feed grains are subject to volatile price
changes caused by factors described below that include weather, size of harvest, transportation and
storage costs and the agricultural policies of the United States and foreign governments. The price
fluctuations of feed grains have a direct and material effect on the Company’s profitability.
Generally, the Company purchases its corn, soybean meal and other feed ingredients for prompt
delivery to its feed mills at market prices at the time of such purchases. The Company sometimes
will purchase feed ingredients for deferred delivery that typically ranges from one month to twelve
months after the time of purchase. The grain purchases are made directly with our usual grain
suppliers, which are companies in the regular business of supplying grain to end users, and do not
involve options to purchase. Such purchases occur when senior management concludes that market
factors indicate that prices at the time the grain is needed are likely to be higher than current
prices, or where, based on current and expected market prices for the Company’s poultry products,
management believes it can purchase feed ingredients at prices that will allow the Company to earn
a reasonable return for its shareholders. Market factors considered by management in determining
whether or not and to what extent to buy grain for deferred delivery include:
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Current market prices; |
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Current and predicted weather patterns in the United States, South America, China and
other grain producing areas, as such weather patterns might affect the planting, growing,
harvesting and yield of feed grains; |
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| |
• |
|
The expected size of the harvest of feed grains in the United States and other grain
producing areas of the world as reported by governmental and private sources; |
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| |
• |
|
Current and expected changes to the agricultural policies of the United States and
foreign governments; |
14
| |
• |
|
The relative strength of United States currency and expected changes therein as it might
impact the ability of foreign countries to buy United States feed grain commodities; |
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| |
• |
|
The current and expected volumes of export of feed grain commodities as reported by
governmental and private sources; |
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| |
• |
|
The current and expected use of available feed grains for uses other than as livestock
feed grains (such as the use of corn for the production of ethanol, which use is impacted by
the price of crude oil); and |
| |
| |
• |
|
Current and expected market prices for the Company’s poultry products. |
The Company purchases physical grain, not financial instruments such as puts, calls or
straddles that derive their value from the value of physical grain. Thus, the Company does not use
derivative financial instruments as defined by SFAS 133, “Accounting for Derivatives for
Instruments and Hedging Activities.” The Company does not enter into any derivative transactions or
purchase any grain-related contracts other than the physical grain contracts described above.
The cost of feed grains is recognized in cost of sales, on a first-in-first-out basis, at the
same time that the sales of the chickens that consume the feed grains are recognized.
The Company’s interest expense is sensitive to changes in the general level of U.S. interest
rates. The Company maintains certain of its debt as fixed rate in nature to mitigate the impact of
fluctuations in interest rates. The fair value of the Company’s fixed rate debt approximates the
carrying amount at July 31, 2007. Management believes the potential effects of near-term changes
in interest rates on the Company’s debt is not material.
The Company is a party to no other market risk sensitive instruments requiring disclosure.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Company’s Securities Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms,
and that such information is accumulated and communicated to the Company’s management, including
its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
An evaluation was performed under the supervision and with the participation of the Company’s
management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of the Company’s disclosure controls and procedures. Based on that
evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the Company’s disclosure controls and procedures were effective as of July
31, 2007. There have been no changes in the Company’s internal control over financial reporting
during the fiscal quarter ended July 31, 2007 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 6, 2006, Annie Collins, a former employee of the processing division subsidiary, on behalf
of herself and as representative of “a class of individuals who are similarly situated and who have
suffered the same or similar damages” filed a complaint against the Company’s processing and
production subsidiaries in the United States District Court for the Eastern District of Louisiana.
Plaintiffs allege that the Company’s subsidiaries violated the Fair Labor Standards Act by
failing to pay plaintiffs and other hourly employees for the time spent donning and doffing
protective and sanitary clothing and performing other alleged compensable activities, and that
“Sanderson automatically deducted thirty minutes from each worker’s workday for a meal break
regardless of the actual time spent on break.” Plaintiffs also allege that they were not paid
overtime wages at the legal rate. Plaintiffs seek unpaid wages, liquidated damages and injunctive
relief.
On July 31, 2006, following various procedural motions, the Company filed its Answer to the
plaintiffs’ Complaint.
On July 20, 2006, ten current and former employees of the processing division subsidiary filed an
action in the United States District Court for the Eastern District of Louisiana nearly identical
to the one described above. Approximately 3,700 individuals purportedly have given their consent to
be a party plaintiff to this and the aforementioned actions. Since the filing of these two
complaints, six other substantially similar lawsuits were filed in United States District Courts
for the Jackson and Hattiesburg divisions of the
15
Southern District of Mississippi. Unlike the two
previous suits referenced above filed in Louisiana (which suits were consolidated into one action),
these complaints are specific to individual processing locations of the subsidiary Corporation.
On March 26, 2007, the parties to the Louisiana action filed a Joint Motion for Preliminary
Approval of Collection Action Settlement and Appointment of Plaintiff’s Counsel as Class Counsel.
Although not a party to the Louisiana matter, the plaintiffs in the Mississippi suits agreed to be
bound by the settlement reached in the Louisiana suit, and the Mississippi suits have been stayed
pending approval of the settlement motion before the Louisiana Court. On April 11, 2007, the Court
denied the joint motion on two grounds: (1) The motion was premature because no motion to certify a
collective action had been filed in the case, and (2) certain contingencies contained in the
settlement agreement gave rise to concerns about whether the settlement agreement was in accordance
with the Fair Labor Standards Act. The parties filed a Joint Motion for Reconsideration of this
order of the Court, which was granted in part and denied in part by order dated May 3, 2007. In the
order, the Court stated it would permit notice to the class to proceed. The Court also stated that
if certain contingencies agreed to by the parties in the settlement agreement concerning class
participation are met, it will consider the reasonableness of the proposed settlement at a fairness
hearing. This hearing will take place after the August 1, 2007 deadline the Court has set for class
members to opt in to the lawsuit. The parties have agreed to proceed in this manner, and the Court
has authorized the distribution of notice to the class. At the joint request of the parties, the
Court has extended the August 1, 2007 deadline for class members to opt into the lawsuits to
September 14, 2007. Any fairness hearing would be held on a date following this new deadline.
The Company is also involved in various other claims and litigation incidental to its business.
Although the outcome of the matters referred to in the preceding sentence cannot be determined with
certainty, management, upon the advice of counsel, is of the opinion that the final outcome should
not have a material effect on the Company’s consolidated results of operation 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. A determination of the amount of reserves required, if any, for these
matters is made after considerable analysis of each individual case. Because the outcome of these
cases cannot be determined with any certainty, no estimate of the possible loss or range of loss
resulting from the cases can be made. At this time, the Company has not accrued any reserve for
any of these matters. Future reserves may be required if losses are deemed 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 or
changes to reserves or by accruals of losses to reflect any adverse determinations of these legal
proceedings.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in the
Company’s Form 10-K for the fiscal year ended October 31, 2006.
Item 6. Exhibits
The following exhibits are filed with this report.
Exhibit 3.1 Articles of Incorporation of the Registrant dated October 19, 1978. (Incorporated
by reference to Exhibit 4.1 filed with the registration statement on Form S-8 filed by the
Registrant on July 15, 2002, Registration No. 333-92412.)
Exhibit 3.2 Articles of Amendment, dated March 23, 1987, to the Articles of Incorporation of
the Registrant. (Incorporated by reference to Exhibit 4.2 filed with the registration statement on
Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)
Exhibit 3.3 Articles of Amendment, dated April 21, 1989, to the Articles of Incorporation of
the Registrant. (Incorporated by reference to Exhibit 4.3 filed with the registration statement on
Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)
Exhibit 3.4 Certificate of Designations of Series A Junior Participating Preferred Stock of
the Registrant dated April 21, 1989. (Incorporated by reference to Exhibit 4.4 filed with the
registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No.
333-92412.)
Exhibit 3.5 Article of Amendment, dated February 20, 1992, to the Articles of Incorporation of
the Registrant. (Incorporated by reference to Exhibit 4.5 filed with the registration statement on
Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)
16
Exhibit 3.6 Article of Amendment, dated February 27, 1997, to the Articles of Incorporation of
the Registrant. (Incorporated by reference to Exhibit 4.6 filed with the registration statement on
Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)
Exhibit 3.7 Bylaws of the Registrant, amended and restated as of December 2, 2004.
(Incorporated by reference to Exhibit 3 filed with the Registrant’s Current Report on Form 8-K on
December 8, 2004.)
Exhibit 15* Accountants’ Letter re: Unaudited Financial Information.
Exhibit 31.1* Certification of Chief Executive Officer.
Exhibit 31.2* Certification of Chief Financial Officer.
Exhibit 32.1** Section 1350 Certification.
Exhibit 32.2** Section 1350 Certification.
|
|
|
| * |
|
Filed herewith. |
| |
| ** |
|
Furnished herewith. |
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SANDERSON FARMS, INC.
(Registrant)
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|
|
|
|
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|
|
| Date: August 28, 2007 |
By: |
/s/ D. Michael Cockrell
|
|
| |
|
Treasurer and Chief |
|
| |
|
Financial Officer |
|
| |
| |
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|
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|
| Date: August 28, 2007 |
By: |
/s/ James A. Grimes
|
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Secretary and Principal |
|
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|
Accounting Officer |
|
18
INDEX TO EXHIBITS
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibit |
| |
3.1 |
|
|
Articles of Incorporation of the Registrant dated October 19,
1978. (Incorporated by reference to Exhibit 4.1 filed with the
registration statement on Form S-8 filed by the Registrant on July
15, 2002, Registration No. 333-92412.) |
| |
|
|
|
|
| |
3.2 |
|
|
Articles of Amendment, dated March 23, 1987, to the Articles of
Incorporation of the Registrant. (Incorporated by reference to
Exhibit 4.2 filed with the registration statement on Form S-8
filed by the Registrant on July 15, 2002, Registration No.
333-92412.) |
| |
|
|
|
|
| |
3.3 |
|
|
Articles of Amendment, dated April 21, 1989, to the Articles of
Incorporation of the Registrant. (Incorporated by reference to
Exhibit 4.3 filed with the registration statement on Form S-8
filed by the Registrant on July 15, 2002, Registration No.
333-92412.) |
| |
|
|
|
|
| |
3.4 |
|
|
Certificate of Designations of Series A Junior Participating
Preferred Stock of the Registrant dated April 21, 1989.
(Incorporated by reference to Exhibit 4.4 filed with the
registration statement on Form S-8 filed by the Registrant on July
15, 2002, Registration No. 333-92412.) |
| |
|
|
|
|
| |
3.5 |
|
|
Article of Amendment, dated February 20, 1992, to the Articles of
Incorporation of the Registrant. (Incorporated by reference to
Exhibit 4.5 filed with the registration statement on Form S-8
filed by the Registrant on July 15, 2002, Registration No.
333-92412.) |
| |
|
|
|
|
| |
3.6 |
|
|
Article of Amendment, dated February 27, 1997, to the Articles of
Incorporation of the Registrant. (Incorporated by reference to
Exhibit 4.6 filed with the registration statement on Form S-8
filed by the Registrant on July 15, 2002, Registration No.
333-92412.) |
| |
|
|
|
|
| |
3.7 |
|
|
Bylaws of the Registrant amended and restated as of December 2,
2004. (Incorporated by reference to Exhibit 3 filed with the
Registrant’s Current Report on Form 8-K on December 8, 2004.) |
| |
|
|
|
|
| |
15* |
|
|
Accountants’ Letter re: Unaudited Financial Information. |
| |
|
|
|
|
| |
31.1* |
|
|
Certification of Chief Executive Officer |
| |
|
|
|
|
| |
31.2* |
|
|
Certification of Chief Financial Officer |
| |
|
|
|
|
| |
32.1** |
|
|
Section 1350 Certification. |
| |
|
|
|
|
| |
32.2** |
|
|
Section 1350 Certification. |
*
Filed herewith.
** Furnished herewith.
19