Sanderson Farms, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM
10-Q/A
(Amendment No. 1)
(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 January 31, 2006
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
Sanderson Farms, Inc.
(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
incorporation or organization)
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(I.R.S. Employer
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) |
(601) 649-4030
(Registrant’s telephone number, including area code)
225 N. 13th Avenue, Laurel, Mississippi, 39440
(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 þ 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
as defined in Rule 12b-2 of the Exchange Act.
Large
Accelerated filer o
Acclerated filer þ Non-acclerated 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 þ
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 Per Share Par Value 20,067,383 shares outstanding
as of January 31, 2006.
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-Q/A amends certain items of the Quarterly Report on Form 10-Q
of Sanderson Farms, Inc. (the “Company” or the “Registrant”) for the fiscal quarter ended January
31, 2006 as filed with the Securities and Exchange Commission on February 28, 2006 (the “Quarterly
Report”) and presents only the items of the Quarterly Report that are being amended. This Form
10-Q/A does not reflect events occurring after the filing of the original Quarterly Report or
modify or update those disclosures affected by subsequent events.
The amendments include the following:
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Part I, Item 1, “Financial Statements,” is being amended to revise Note 6 to the Condensed Consolidated
Financial Statements (Unaudited), “Hurricane Receivable”; |
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Part I, Item 1 is also being amended to add Note 8,
“Other Matters”; |
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Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” is being amended under the paragraph entitled
“Contingencies” to clarify that the Company cannot estimate the possible loss or
range of losses resulting from the legal proceedings to which it is a party and |
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Part I, Item 2 is also being amended to revise the disclosure concerning receivables resulting from Hurricane Katrina. |
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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January 31, |
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October 31, |
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2006 |
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2005 |
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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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$ |
2,249 |
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$ |
34,616 |
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Accounts receivable, net |
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41,544 |
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38,833 |
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Receivable from insurance companies |
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12,894 |
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14,892 |
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Inventories |
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89,811 |
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84,713 |
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Prepaid expenses |
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15,825 |
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11,599 |
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Total current assets |
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162,323 |
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184,653 |
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Property, plant and equipment |
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530,872 |
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508,912 |
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Less accumulated depreciation |
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(255,761 |
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(249,586 |
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275,111 |
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259,326 |
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Other assets |
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2,105 |
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1,812 |
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Total assets |
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$ |
439,539 |
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$ |
445,791 |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
65,994 |
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$ |
72,616 |
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Current maturities of long-term debt |
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4,413 |
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4,406 |
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Total current liabilities |
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70,407 |
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77,022 |
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Long-term debt, less current maturities |
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16,373 |
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6,511 |
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Claims payable |
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2,900 |
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2,900 |
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Deferred income taxes |
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13,890 |
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13,705 |
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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, $1 par value: authorized
100,000,000 shares; issued and
outstanding shares — 20,067,383 and
20,063,070 at January 31, 2006 and
October 31, 2005, respectively |
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20,067 |
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20,063 |
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Paid-in capital |
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10,393 |
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22,657 |
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Unearned compensation |
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0 |
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(13,607 |
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Retained earnings |
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305,509 |
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316,540 |
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Total stockholders’ equity |
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335,969 |
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345,653 |
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Total liabilities and stockholders’ equity |
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$ |
439,539 |
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$ |
445,791 |
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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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January 31, |
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2006 |
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2005 |
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Net sales |
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$ |
222,114 |
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$ |
233,290 |
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Cost and expenses: |
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Cost of sales |
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222,765 |
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203,755 |
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Selling, general and administrative |
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13,384 |
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13,027 |
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236,149 |
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216,782 |
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OPERATING INCOME (LOSS) |
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(14,035 |
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16,508 |
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Other income (expense): |
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Interest income |
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124 |
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199 |
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Interest expense |
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(76 |
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(318 |
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Other |
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39 |
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4 |
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87 |
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(115 |
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INCOME (LOSS) BEFORE INCOME TAXES |
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(13,948 |
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16,393 |
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Income tax expense (benefit) |
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(5,342 |
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6,352 |
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NET INCOME (LOSS) |
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$ |
(8,606 |
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$ |
10,041 |
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Earnings (loss) per share: |
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Basic |
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$ |
(.43 |
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$ |
.50 |
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Diluted |
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$ |
(.43 |
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$ |
.50 |
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Dividends per share |
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$ |
.12 |
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$ |
.10 |
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Weighted average shares outstanding: |
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Basic |
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20,064 |
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19,962 |
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Diluted |
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20,064 |
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20,115 |
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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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Three Months Ended |
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January 31, |
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2006 |
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2005 |
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(In thousands) |
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Operating activities |
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Net income (loss) |
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$ |
(8,606 |
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$ |
10,041 |
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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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6,461 |
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6,267 |
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Non-cash stock compensation |
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726 |
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0 |
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Change in assets and liabilities: |
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Accounts receivable, net |
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(2,712 |
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6,983 |
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Receivable from insurance companies |
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1,998 |
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0 |
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Inventories |
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(5,098 |
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2,727 |
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Other assets |
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(5,473 |
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1,139 |
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Accounts payable and accrued expenses |
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(5,507 |
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(11,559 |
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Total adjustments |
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(9,605 |
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5,557 |
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Net cash provided by (used in) operating activities |
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(18,211 |
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15,598 |
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Investing activities |
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Capital expenditures |
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(22,819 |
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(15,476 |
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Net proceeds from sale of property and equipment |
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598 |
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7 |
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Net cash used in investing activities |
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(22,221 |
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(15,469 |
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Financing activities |
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Principal payments on long-term debt |
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(131 |
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(125 |
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Net borrowings from revolving line of credit |
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10,000 |
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0 |
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Net proceeds from issuance of common stock (22,872 shares in 2006 and 10,125 shares in 2005) |
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648 |
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232 |
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Dividends paid |
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(2,452 |
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(1,997 |
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Net cash provided by (used in) financing activities |
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8,065 |
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(1,890 |
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Net change in cash and cash equivalents |
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(32,367 |
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(1,761 |
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Cash and cash equivalents at beginning of period |
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34,616 |
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75,910 |
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Cash and cash equivalents at end of period |
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$ |
2,249 |
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$ |
74,149 |
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See notes to condensed consolidated financial statements.
5
SANDERSON FARMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
January 31, 2006
NOTE 1 — BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States 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 accounting principles
generally accepted in the United States 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-month period ended January 31,
2006 are not necessarily indicative of the results that may be expected for the year ending October
31, 2006.
The consolidated balance sheet at October 31, 2005 has been derived from the audited consolidated
financial statements at that date but does not include all of the information and footnotes
required by accounting principles generally accepted in the United States 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, 2005.
NOTE 2—INVENTORIES
Inventories consisted of the following:
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January 31, |
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October 31, |
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2006 |
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2005 |
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(In thousands) |
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Live poultry-broilers and breeders |
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$ |
50,508 |
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$ |
42,662 |
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Feed, eggs and other |
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11,089 |
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10,983 |
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Processed poultry |
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16,860 |
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19,881 |
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Processed food |
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6,520 |
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6,905 |
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Packaging materials |
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4,834 |
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4,282 |
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$ |
89,811 |
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$ |
84,713 |
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NOTE
3—STOCK COMPENSATION PLANS
The following describes major changes to benefit plans that have occurred since October 31, 2005.
Refer to Notes 8 and 9 of our October 31, 2005 audited financial statements for further information
on our employee benefit plans and stock compensation plans.
During the quarter ended January 31, 2006, the Company granted 40,050 shares of restricted stock to
certain officers, directors and key employees. The restricted stock had a grant date fair value of
$35.25 per share and vests four years from the date of grant. Also, during the quarter,
participants in the Company’s Management Share Purchase Plan purchased a total of 18,559 shares of
restricted
6
stock at an average price of $31.02 and the Company issued 4,620 matching restricted shares. Total
stock based compensation expense applicable to the Company’s restricted stock grants was $726,000
for the quarter ended January 31, 2006.
During the quarter ended January 31, 2006, 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 three-year
performance period beginning November 1, 2005. If the Company’s average return on equity and
average return on sales exceed certain threshold amounts for the three-year performance period,
participants will receive 50% to 150% of the target number of shares, depending upon the Company’s
level of performance. The target number of shares specified in the performance share agreements
executed during the quarter ended January 31, 2006 totaled 73,950. No compensation cost was
recognized for the performance shares during the quarter ended January 31, 2006 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 for the three months ended January 31, 2005 was calculated by dividing net income by the
weighted-average number of common shares outstanding during the period plus the dilutive effects of
stock options outstanding. There were 153,000 weighted average dilutive shares outstanding for the
three months ended January 31, 2005. Restricted stock and employee stock options representing
88,924 common shares were excluded from the calculation of diluted net loss per share for the three
months ended January 31, 2006 because the effect was antidilutive. There were no restricted stock
outstanding during the three months ended January 31, 2005.
NOTE 5 — NEW REVOLVING CREDIT FACILITY
On November 17, 2005, the Company entered into a new $200.0 million revolving credit facility with
six banks that extends until 2010. Borrowings are at prime or below and may be prepaid without
penalty. A commitment fee of .25% is payable quarterly on the unused portion of the revolver.
Covenants related to the revolving credit facility include requirements for maintenance of minimum
consolidated net working capital, tangible net worth, debt to total capitalization and current
ratio. As of January 31, 2006, the Company is in compliance with all covenants. The agreement
also establishes limits on dividends, assets that can be pledged and capital expenditures. The
Company had $190.0 million available to borrow under the line of credit at January 31, 2006.
NOTE 6 — HURRICANE RECEIVABLE
The Company’s financial statements for the first fiscal quarter ended January 31, 2006, reflect a
receivable from the Company’s insurance carriers of $12.9 million for property damage and expenses
incurred resulting from Hurricane Katrina. The Company’s total insurance claim through October 31,
2005, for property damage, expenses incurred and lost profits is approximately $26.3 million, net
of the applicable deductible of $2,750,000. The Company received $5.0 million during the first
quarter of fiscal 2006 from the insurance carriers as an initial draw on the claim. During the
first quarter of fiscal 2006 and the fourth quarter of fiscal 2005, operating income was reduced by
unrecognized lost profits and expenses of approximately $3.0 million and $5.1 million,
respectively. The unrecognized lost profits and expenses of $8.1 million during the first quarter
of fiscal 2006 and the fourth quarter of fiscal 2005 were the direct result of the effect of
Hurricane Katrina and the Company’s efforts to minimize the potential loss from the hurricane.
Of the $8.1 million of unrecognized lost profits and expenses, $2.0 million was attributable to
additional costs to compensate the Company’s contract poultry producers for the loss of revenue
they incurred because of decreased efficiencies resulting from the storm. These payments to the
Company’s contract poultry producers were included in cost of sales on the Company’s income
statement for the year ended October 31, 2005 and the quarter ended January 31, 2006. While the
Company’s management believes these additional payments to contract poultry producers are covered
by the terms of the its insurance policies, it cannot deem such recovery as probable, and therefore
did not recognize any possible reimbursement of these costs in its financial statements. The Company will recognize any reimbursements of these costs if and when they are received, and any
such reimbursements will be classified in the period received as other income, with appropriate
disclosures of the nature of such amount.
Also included in the $8.1 million is $6.1 million in lost profits. For several weeks after
Hurricane Katrina, the Company was unable to sustain the workforce required to produce higher
margin products normally sold by the Company, and therefore suffered $3.3 million in lost profits
due to a less profitable product mix during the weeks immediately following the storm. The reasons
for these human resource issues included the unavailability of fuel, damage to employees’ personal
property and impassable roads due to down trees and power lines. In addition, the Company lost
profits of $2.8 million that would have been realized on sales of live inventories destroyed by the
hurricane. The Company has not recognized these lost profits as of January 31, 2006, but will
recognize these amounts as other income when and if it receives reimbursement from the Company’s
insurance carriers, with appropriate disclosures of the nature of such amounts.
NOTE 7—NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” SFAS
No. 151 amends Accounting Research Bulletin No. 43, Chapter 4, to clarify that abnormal amounts of
idle facility expense, freight handling costs and wasted materials (spoilage) should be recognized
as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production
overhead to inventory be based on the normal capacity of the production facilities during fiscal
years beginning after June 15, 2005. The Company’s adoption of SFAS No. 151 in the first quarter of fiscal 2006 did not have a significant impact on the
Company’s results of operations, financial position or cash flows.
7
In December 2004, the FASB issued SFAS Statement No. 123 (revised 2004), “Share-Based Payment,”
which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R)
supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS No. 95,
“Statement of Cash Flows”. SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, restricted stock and performance-based shares to be
recognized in the income statement based on their fair values. SFAS No. 123(R) also requires the
benefits of tax deductions in excess of recognized compensation cost to be reported as a financing
cash flow, rather than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash flows in periods
after adoption. In the first quarter of fiscal 2006, the Company adopted SFAS No. 123(R) using the
modified prospective method. Under the modified prospective method, compensation cost will be
recognized for all share-based payments granted after the adoption of SFAS No. 123(R) and for all
awards granted to employees prior to the adoption date of SFAS No. 123R that remain unvested on the
adoption date. Accordingly, no restatements were made to prior periods. The adoption of SFAS No.
123(R) was not significant to the Company’s operations or financial position for the fiscal 2006
first quarter.
Prior to adoption of SFAS No. 123(R), the Company accounted for share-based payments to employees
using APB 25’s intrinsic value method and, as such, generally recognized no compensation cost for
employee stock options. Under APB 25, the Company recorded unearned compensation in the
shareholders’ equity section of its balance sheet upon the grant of restricted stock and amortized
the unearned compensation over the vesting period. Based upon the provisions of SFAS No. 123(R),
the Company was required to reverse the previously recorded unearned compensation and to accrue
stock based compensation expense as it is earned.
NOTE 8 — OTHER MATTERS
On May 19, 2003, a lawsuit was filed on behalf of 74 individual plaintiffs in the United States
District Court for the Southern District of Mississippi alleging an “intentional pattern and
practice of race discrimination and hostile environment in violation of Title VII and Section 1981
rights.” This lawsuit alleges that Sanderson Farms, in its capacity as an employer, has “engaged in
(and continues to engage in) a pattern and practice of intentional unlawful employment
discrimination and intentional unlawful employment practices at its plants, locations, off-premises
work sites, offices, and facilities in Pike County, Mississippi...in violation of Title VII of the
Civil Rights Act of 1964 (as amended)... .” The action further alleges that “Sanderson Farms has
willfully, deliberately, intentionally, and with malice deprived black workers in its employ of the
full and equal benefits of all laws in violation of the Civil Rights Act.. .” On June 6, 2003,
thirteen additional plaintiffs joined in the pending lawsuit by the filing of a First Amended
Complaint. This brought the total number of plaintiffs to 87.
The plaintiffs in this lawsuit seek, among other things, back pay and other compensation in the
amount of $500,000 each and unspecified punitive damages. The Company has aggressively defended the
lawsuit and will continue to do so. The Company has a policy of zero tolerance for discrimination
of any type, and preliminarily investigated the complaints alleged in this lawsuit when they were
brought as EEOC charges. This investigation, which is ongoing, has substantiated none of the
complaints alleged in the lawsuit, and the Company believes the charges are without merit. On July
21, 2003, the Company filed a Motion to Dismiss or, alternatively, Motion for Summary Judgment or
Motion for More Definite Statement. On December 17, 2003, the court entered its order denying the
Company’s motion for summary judgment, but granting its motion for more definite statement. The
court also ordered that the union representing some of the plaintiffs be joined as a defendant.
The court gave the plaintiffs until January 26, 2004 to amend their complaint to more specifically
set out their claims. Although the Company’s motion to dismiss was denied, the court’s order
permits the Company to refile its dispositive motions after the plaintiffs file an amended
complaint. On January 27, 2004, 84 of the 87 plaintiffs filed their Second Amended Complaint. The remaining three plaintiffs
voluntarily dismissed their claims. The Company filed its answer to the plaintiffs’ second amended
complaint on March 26, 2004, denying any and all liability and setting forth numerous affirmative
defenses. On July 1, 2004, the Company filed a Motion to Sever Plaintiffs’ Cases, wherein the
Company requested that the court sever the pending lawsuit with 84 plaintiffs into 84 separate
lawsuits, one for each plaintiff. The Company asserted in its motion that this relief should be
granted because the 84 cases are too dissimilar and were misjoined. The Company further asserted
that it would be prejudiced by being subjected to one common trial for all 84 plaintiffs, rather
than separate trials for each plaintiff. On August 26, 2004, the Court issued its order severing
this case into six separate causes of action, with the plaintiffs divided into six groups based on
their job classifications. On October 12, 2004, the plaintiffs filed new complaints for each of
the six severed cases, which the Company answered on November 24, 2004. A case management
conference for each of the six cases was held on December 28, 2004, during which various procedural
issues related to discovery were settled. On September 28, 2005, the Company filed a Motion for a
Pre-Trial conference seeking to preclude the plaintiffs from utilizing a “pattern and practice”
method of proof. This method of proof is typically reserved for class action cases, or cases
brought by the government. The plaintiffs had indicated their intention to use this method of
proof in the pleadings and discovery requests filed up to the date of the Company’s motion. On
October 26, 2005, the court entered an order ruling that the plaintiffs would not be permitted to
use the “pattern and practice” method of proof. Six separate trials are scheduled during 2006 and
2007 for the plaintiffs’ causes of actions. The first of the six trials is currently set for
September 18, 2006.
On September 26, 2000, three current and former contract growers filed suit against the Company in
the Chancery Court of Lawrence County, Mississippi. The plaintiffs filed suit on behalf of “all
Mississippi residents to whom, between, on or about November 1981 and the present, the Company
induced into growing chickens for it and paid compensation under the so-called ‘ranking system’.”
Plaintiffs allege that the Company “has defrauded plaintiffs by unilaterally imposing and utilizing
the so-called ‘ranking system’ which wrongfully places each grower into a competitive posture
against other growers and arbitrarily penalizes each less successful grower based upon criteria
which were never revealed, explained or discussed with plaintiffs.” Plaintiffs further allege that
they are required to accept chicks that are genetically different and with varying degrees of
healthiness, and feed of dissimilar quantity and quality. Finally, plaintiffs allege that they are
ranked against each other although they possess dissimilar facilities, equipment and technology.
Plaintiffs seek an unspecified amount in compensatory and punitive damages, as well as varying
forms of equitable relief.
The Company is vigorously defending and will continue to vigorously defend this action. On
November 22, 2002, the Court denied the Company’s motions to compel arbitration, challenging the
jurisdiction of the Chancery Court of Lawrence County, Mississippi, and seeking to have the case
dismissed pursuant to rule 5(c) of the Mississippi Rules of Civil Procedure. The Company then
filed its motion for interlocutory appeal on these issues with the Mississippi Supreme Court. On
December 6, 2002, the Mississippi Supreme Court agreed to hear this motion and stayed the action in
the Chancery Court pending disposition of this motion. The Company’s motion for interlocutory
appeal was granted and this matter is pending before the Mississippi Supreme Court. The Supreme
Court granted the Company’s request that this case be consolidated with a second grower suit discussed below. Both this matter and the matter discussed below were decided
by the court on October 6, 2005 with a decision in favor of the Company.
On August 2, 2002, three contract egg producers filed suit against the Company in the Chancery
Court of Jefferson Davis County, Mississippi. The Plaintiffs filed suit on behalf of “all
Mississippi residents who, between June 1993 and the present, [the Company] fraudulently and
negligently induced into housing, feeding and providing water for [the Company’s] breeder flocks
and gathering, grading, packaging and storing the hatch eggs generated by said flocks and who have
been compensated under the payment method established by the [Company].” Plaintiffs alleged that
the Company “has defrauded Plaintiffs by unilaterally imposing and utilizing a method of payment
which wrongfully and arbitrarily penalizes each grower based upon criteria which are under the
control of the [Company] and which were never revealed, explained or discussed with each
Plaintiff.” Plaintiffs allege that they were required to accept breeder hens and roosters which
are genetically different, with varying degrees of healthiness, and feed of dissimilar quantity and
quality. Plaintiffs further allege contamination of and damage to their real property. Plaintiffs
alleged that they were “fraudulently and negligently induced into housing, feeding and providing
water for the Company’s breeder flocks and gathering, grading, packaging and storing the hatch eggs
produced from said flocks” for the Company. Plaintiffs seek unspecified amount of compensatory and
punitive damages, as well as various forms of equitable relief.
On September 5, 2002, the Company filed its Motion to Dismiss and/or Transfer Jurisdiction and/or
to Compel Arbitration and/or for Change of Venue. A hearing of this motion was completed on
November 18, 2003. Prior to completion of the hearing, the Company filed a request with the
American Arbitration Association (“AAA”) to arbitrate the claims made in this lawsuit. On June 7,
2004, the Chancery Court of Jefferson Davis County, Mississippi entered an Order denying all of the
relief requested by the Company in its motion dated September 5, 2002. On June 29, 2004, the
Company filed a Notice of Appeal and/or, in the Alternative, Petition to Appeal from Interlocutory
Order and Motion for Stay Pursuant to M.R.A.P.5(c) with the Mississippi Supreme Court, requesting
appellate review of the Chancery Court’s Order. On August 11, 2004, the Mississippi Supreme Court
entered its Order accepting jurisdiction under the Notice of Appeal portion of the Company’s June
29, 2004 filing, but dismissed the Alternative Petition for Interlocutory Appeal portion of the
same filing as moot. The court also agreed to consolidate this case with the broiler grower
lawsuit described above. The Mississippi Supreme Court continued the stay previously entered,
holding in abeyance the trial court proceedings pending a ruling by it on the consolidated appeals
of both grower lawsuits. On October 6, 2005, the court decided this matter, together with the
grower suit discussed above, in favor of the Company.
The plaintiffs in each of the grower lawsuits indicated that they planned to request a rehearing
before the court and had until January 18, 2006 to file such a request. However, that deadline
passed with no such request being filed. As a result, the Mississippi Supreme Court entered its
final mandate in this matter on January 24, 2006, and this matter is now final.
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.
8
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 January 31, 2006, and the related condensed consolidated statements of operations and cash
flows for the three-month periods ended January 31, 2006 and 2005. 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. as of
October 31, 2005, and the related consolidated statements of income, stockholders’ equity, and cash
flows for the year then ended not presented herein, and in our report dated December 22, 2005, 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,
2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
New Orleans, Louisiana
February 27, 2006
9
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, 2005.
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.
10
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, Sanderson Farms, Inc. announced that sites in Waco and McLennan County,
Texas have been selected for construction of a new poultry processing plant and wastewater
treatment facility and hatchery. These facilities will comprise a state-of-the-art poultry complex
with the capacity to process 1.2 million birds per week for the big bird deboning market. At full
capacity, the complex will employ approximately 1,300 people, will require 150 contract growers,
and will be equipped to process and sell 8.4 million pounds per week of dressed poultry meat at
full production.
Sanderson
Farms expects to invest approximately $70.0 million in the new Texas complex, and
anticipates that associated contract growers will invest an
additional $115.0 million in poultry
production facilities. The Company expects to begin construction of the facilities this spring,
with initial operation of the new complex scheduled to begin in May of 2007. Sanderson Farms will
also expand its feed mill in Easterly, Texas, and use that feed milling capacity to satisfy the
live production needs associated with the new complex.
EXECUTIVE OVERVIEW OF RESULTS
The Company’s financial results for the first quarter of fiscal 2006 reflect significantly lower
prices for poultry products, the start-up of the second shift of the first line at the Company’s
new poultry processing complex in South Georgia and conversion of the Collins, Mississippi poultry
processing plant to the big bird deboning market, increased cost of soybean meal and higher fuel
and utility prices. In addition, during the first quarter of fiscal 2006, the Company continued to
experience the negative impact of Hurricane Katrina.
RESULTS OF OPERATIONS
Net sales for the first quarter of fiscal 2006 were $222.1 million as compared to $233.3 million
for the first quarter of fiscal 2005, a decrease of $11.2 million or 4.8%. The decrease in net
sales during the first quarter of fiscal 2006 reflects a 9.7% decrease in the average sale price of
the Company’s poultry products, partially offset by an increase in the pounds of poultry products
sold of 3.7%. The decrease in the average sale price of the Company’s poultry products resulted
primarily from decreases in the market prices of boneless breast meat, tenders and wings of 21.2%,
13.9% and 17.6%, respectively. The average market price for bulk leg quarters during the first
quarter of fiscal 2006 were 10.7% lower than the same quarter in fiscal 2005. In addition, a
simple average of the Georgia Dock prices for whole chickens decreased 3.2% when these same periods
are compared. Net sales of prepared food products increased $2.0 million, or 7.5% during the three
months ended January 31, 2006 as compared to the three months ended January 31, 2005. This
increase resulted from a 16.4% increase in the pounds of prepared food products sold and a decrease
of 7.6% in the average sales price of prepared food products sold.
Cost of sales for the three months ended January 31, 2006, were $222.8 million, an increase of
$19.0 million, or 9.3% as compared to the same three months ended January 31, 2005. Cost of sales
of the Company’s poultry products increased $16.3 million, or 9.0%. The increase in the cost of
sales of poultry products resulted from an increase in the pounds of poultry products sold at the
Company’s new poultry complex in South Georgia which will not reach operational efficiency until
full capacity is obtained during the summer of fiscal 2006. The Company estimates that the cost of
sales in the three months ended January 31, 2006 was affected by
approximately
$3.5 million due
to the start up nature of the new Georgia facility. Also, the Company’s cost of sales was
negatively impacted by an increase in the cost of corn and soybean meal during the first quarter of
fiscal 2006 as compared to the first quarter of 2005. A simple average of the corn and soybean
meal cash market prices during the first quarter of fiscal 2006 as compared to same quarter during
fiscal 2005 reflect an increase of 2.6% and 14.6%, 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
16.4%. The Company’s prepared food products have a higher average cost of sales per pound than the
Company’s poultry products. Cost of sales of prepared food products increased $2.7 million or
11.8%.
Selling, general and administrative costs for the three months ended January 31, 2006 were $13.4
million as compared to $13.0 million during the three months ended January 31, 2005. The increase
in selling, general and administrative costs of $0.4 million resulted from amortization of
restricted stock grants issued during the second quarter of fiscal 2005 and the first quarter of
fiscal 2006. The increase in amortization of restricted stock was partially offset by slightly
lower advertising expenditures and expenses that were incurred during the first quarter of fiscal
2005 related to the start up of the new poultry complex in South Georgia later during fiscal
11
2005. All costs of operating the new complex in South Georgia, except for certain sales related
expenditures, are included in cost of sales during the three months ended January 31, 2006.
For the three months ended January 31, 2006, the Company’s operating loss was $14.0 million as
compared to an operating income of $16.5 million for the three months ended January 31, 2005. The
reduction of $30.5 million is the result of a significant reduction in poultry prices during the
quarter, increased cost of soybean meal, higher fuel and utility prices and an estimated loss of
$3.0 million from Hurricane Katrina during the first quarter of fiscal 2006. The estimated loss of
$3.0 million 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.
In addition, the Company’s operations were negatively impacted by the start up of the second shift
of the first line at the new poultry complex in South Georgia and the conversion of the Collins,
Mississippi processing plant to a big bird deboning plant. The Collins, Mississippi plant was down
for one week during the first quarter of fiscal 2006 to allow for the installation of required
equipment changes.
Interest expense during the three months ended January 31, 2006 was $76,000 as compared to $318,000
during the three months ended January 31, 2005. The reduction in interest expense was due to the
capitalization of $227,000 of interest incurred during the first quarter of fiscal 2006 to the cost
of construction of the new general offices in Laurel, Mississippi and the new feed mill under
construction in Collins, Mississippi and lower outstanding debt.
The Company’s effective tax rate for the three months ended January 31, 2006 and 2005 was 38.30%
and 38.75%, respectively.
The Company’s net loss was $8.6 million or $.43 per share for the first quarter of fiscal 2006 as
compared to net income for the first quarter of fiscal 2005 of $10.0 million, or $.50 per share.
During the first quarter of fiscal 2006 the Company incurred certain expenses and lost profits of
$3.0 million before income taxes from Hurricane Katrina. The Company intends to seek reimbursement
for the unrecognized lost profits and incurred expense of $3.0 million incurred during the first
quarter of fiscal 2006. Negotiations with
the Company’s insurance carriers are expected to be completed during fiscal 2006.
Liquidity and Capital Resources
The Company’s working capital at January 31, 2006 was $91.9 million and its current ratio was 2.3
to 1. This compares to working capital of $107.6 million and a current ratio of 2.4 to 1 as of
October 31, 2005. During the three months ended January 31, 2006 the Company spent approximately
$22.8 million on planned capital projects, which include $6.1 million on the new general offices in
Laurel, Mississippi, $3.2 million on the new feed mill under construction in Collins, Mississippi
and $3.4 million to increase the capacity of the Collins, Mississippi hatchery and to complete the
conversion of the Collins, Mississippi poultry processing plant to the big bird deboning market.
The
Company’s capital budget for fiscal 2006 is approximately $74.1 million at January 31, 2006,
and will be funded by cash on hand, internally generated working capital and cash flows from
operations. If needed, the Company has $190.0 million available under its revolving line of credit
at January 31, 2006. The fiscal 2006 capital budget includes
approximately $8.0 million in
operating leases and $9.4 million to complete construction of the new corporate office building in
Laurel, Mississippi. In addition, the fiscal 2006 capital budget includes $22.5 million to build
a feed mill in Collins, Mississippi, complete the conversion of the Collins, Mississippi processing
facility to a big bird deboning plant, expand the Collins, Mississippi hatchery and $4.8 million to
improve operating efficiencies at the Company’s prepared foods plant in Jackson, Mississippi.
Without operating leases, the new office building and capital investment in Collins and Jackson,
Mississippi, the Company’s capital budget for fiscal 2006 would
be $29.4 million.
On January 12, 2006, Sanderson Farms, Inc. announced that sites in Waco and McLennan County, Texas
have been selected for construction of a new poultry processing plant, wastewater treatment
facility and hatchery. Sanderson Farms will also expand its feed mill in Easterly, Texas to
satisfy the live production needs associated with the new complex. The Company expects to invest
approximately $70.0 million in the new complex during fiscal 2006 and fiscal 2007. The fiscal 2006
capital budget does not include any anticipated investment in the Waco facility because such
investment will not be quantified until engineering is complete in the second quarter of fiscal
2006.
On November 17, 2005, the Company entered into a new revolving credit facility. The new facility,
among other things, increased allowed capital expenditures, changed the net worth covenant to
reflect the Company’s new dividend rate, extended the committed revolver by five years rather than
the usual three year extension, reduced the interest rate charged on amounts outstanding, and
removed a letter of credit commitment related to certain industrial development bonds.
12
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.
13
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 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.
Hurricane Receivable from Insurance Companies
The Company’s financial statements for the first fiscal quarter ended January 31, 2006, reflect a
receivable from the Company’s insurance carriers of $12.9 million for property damage and expenses
incurred resulting from Hurricane Katrina. The Company’s total insurance claim through October 31,
2005, for property damage, expenses incurred and lost profits is approximately $26.3 million, net
of the applicable deductible of $2,750,000. The Company received $5.0 million during the first
quarter of fiscal 2006 from the insurance carriers as an initial draw on the claim. During the
first quarter of fiscal 2006 and the fourth quarter of fiscal 2005, operating income was reduced by
unrecognized lost profits and expenses of approximately $3.0 million and $5.1 million,
respectively. The unrecognized lost profits and expenses of $8.1 million during the first quarter
of fiscal 2006 and the fourth quarter of fiscal 2005 were the direct result of the effect of
Hurricane Katrina and the Company’s efforts to minimize the potential loss from the hurricane.
Of the $8.1 million of unrecognized lost profits and expenses, $2.0 million was attributable to
additional costs to compensate the Company’s contract poultry producers for the loss of revenue
they incurred because of decreased efficiencies resulting from the storm. These payments to the
Company’s contract poultry producers were included in cost of sales on the Company’s income
statement for the year ended October 31, 2005 and the quarter ended January 31, 2006. While the
Company’s management believes these additional payments to contract poultry producers are covered
by the terms of the its insurance policies, it cannot deem such recovery as probable, and therefore
did not recognize any possible reimbursement of these costs in its financial statements. The Company will recognize any reimbursements of these costs if and when they are received, and any
such reimbursements will be classified in the period received as other income, with appropriate
disclosures of the nature of such amount.
Also included in the $8.1 million is $6.1 million in lost profits. For several weeks after
Hurricane Katrina, the Company was unable to sustain the workforce required to produce higher
margin products normally sold by the Company, and therefore suffered $3.3 million in lost profits
due to a less profitable product mix during the weeks immediately following the storm. The reasons
for these human resource issues included the unavailability of fuel, damage to employees’ personal
property and impassable roads due to down trees and power lines. In addition, the Company lost
profits of $2.8 million that would have been realized on sales of live inventories destroyed by the
hurricane. The Company has not recognized these lost profits as of January 31, 2006, but will
recognize these amounts as other income when and if it receives reimbursement from the Company’s
insurance carriers, with appropriate disclosures of the nature of such amounts.
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
14
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. 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.
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 8 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. Further 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 November 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 151, “Inventory Costs, an amendment of ARB No. 43,
Chapter 4.” SFAS No. 151 amends Accounting Research Bulletin No. 43, Chapter 4, to clarify that
abnormal amounts of idle facility expense, freight handling costs and wasted materials (spoilage)
should be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation
of fixed production overhead to inventory be based on the normal capacity of the production
facilities during fiscal years beginning after June 15, 2005. The Company’s adoption of SFAS No.
151 in the first quarter of fiscal 2006 did not have a significant impact on the Company’s results
of operations, financial position or cash flows.
In December 2004, the FASB issued SFAS Statement No. 123 (revised 2004), “Share-Based
Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No.
123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS
No. 95, “Statement of Cash Flows”. SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, restricted stock and performance-based shares to be
recognized in the income statement based on their fair values. SFAS No. 123(R) also requires the
benefits of tax deductions in excess of recognized compensation cost to be reported as a financing
cash flow, rather than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash flows in periods
after adoption. In the first quarter of fiscal 2006, the Company adopted SFAS No. 123(R) using the
modified prospective method. Under the modified prospective method, compensation cost will be
recognized for all share-based payments granted after the adoption of SFAS No. 123(R) and for all
awards granted to employees prior to the adoption date of SFAS No. 123R that remain unvested on the
adoption date. Accordingly, no restatements were made to prior periods. The adoption of SFAS No.
123(R) was not significant to the Company’s operations or financial position for the fiscal 2006
first quarter.
Prior to adoption of SFAS No. 123(R), the Company accounted for share-based payments to
employees using APB 25’s intrinsic value method and, as such, generally recognized no compensation
cost for employee stock options. Under APB 25, the Company recorded unearned compensation in the
shareholders’ equity section of its balance sheet upon the grant of restricted stock and
15
amortized the unearned compensation over the vesting period. Based upon the provisions of
SFAS No. 123(R), the Company was required to reverse the previously recorded unearned compensation
and to accrue stock based compensation expense as it is earned.
16
PART II. OTHER INFORMATION
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.)
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.)
17
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 10.1 Credit Agreement dated November 17, 2005 among Sanderson Farms, Inc. and Harris
N.A., Individually and as Agent for the Banks defined therein. (Incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed November 23, 2005.)
Exhibit 10.2 Guaranty Agreement dated November 17, 2005 of Sanderson Farms, Inc. (Foods
Division), Sanderson Farms, Inc. (Production Division) and Sanderson Farms, Inc. (Processing
Division). (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
8-K filed November 23, 2005.)
Exhibit 10.3 Intercreditor Agreement dated as of November 17, 2005 among The Lincoln National
Life Insurance Company, Harris N.A., SunTrust Bank, AmSouth Bank, U.S. Bank National Association,
Regions Bank, and Trustmark National Bank. (Incorporated by reference to Exhibit 10.3 to the
Registrant’s Current Report on Form 8-K filed November 23, 2005.)
Exhibit 10.4 Form of Restricted Stock Agreement between Registrant and its officers and
employees who are granted restricted stock. (Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed December 2, 2005.)
Exhibit 10.5 Form of Performance Share Agreement between Registrant and its officers and
employees who are granted performance shares. (Incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed December 2, 2005.)
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.
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Filed herewith. |
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Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this amended report to be signed on its behalf by the undersigned thereunto duly authorized.
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SANDERSON FARMS, INC. |
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(Registrant) |
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Date:
June 28, 2006
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By: /s/ D. Michael Cockrell |
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Treasurer and Chief
Financial Officer |
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INDEX TO EXHIBITS
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| Exhibit |
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|
| Number |
|
Description of Exhibit |
3.1
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|
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
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|
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
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|
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.) |
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3.4
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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.) |
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3.5
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|
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.) |
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3.6
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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.) |
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3.7
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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.) |
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|
|
10.1
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|
Credit Agreement dated November 17, 2005 among Sanderson Farms, Inc. and Harris N.A.,
Individually and as Agent for the Banks defined therein. (Incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed November 23, 2005.) |
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10.2
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Guaranty Agreement dated November 17, 2005 of Sanderson Farms, Inc. (Foods Division),
Sanderson Farms, Inc. (Production Division) and Sanderson Farms, Inc. (Processing
Division). (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report
on Form 8-K filed November 23, 2005.) |
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10.3
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Intercreditor Agreement dated as of November 17, 2005 among The Lincoln National Life
Insurance Company, Harris N.A., SunTrust Bank, AmSouth Bank, U.S. Bank National
Association, Regions Bank, and Trustmark National Bank. (Incorporated by reference to
Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed November 23, 2005.) |
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10.4
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Form of Restricted Stock Agreement between Registrant and its officers and employees who
are granted restricted stock. (Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed December 2, 2005.) |
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10.5
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Form of Performance Share Agreement between Registrant and its officers and employees
who are granted performance shares. (Incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed December 2, 2005.) |
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15*
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Accountants’ Letter re: Unaudited Financial Information. |
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31.1*
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Certification of Chief Executive Officer |
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31.2*
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Certification of Chief Financial Officer |
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32.1**
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Section 1350 Certification. |
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32.2**
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Section 1350 Certification. |
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| * |
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Filed herewith. |
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| ** |
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Furnished herewith. |
20