safm-20220430

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

___________________________

FORM 10-Q

___________________________

(MARK ONE)


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

For the quarterly period ended April 30, 2022


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

For the transition period from to

Commission file number: 1-14977

___________________________

Sanderson Farms, Inc.

(Exact name of registrant as specified in its charter)

___________________________


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

127 Flynt Road, Laurel, Mississippi 39443

(Address of principal executive offices) (Zip Code)

(601) 649-4030

(Registrant’s telephone number, including area code)

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

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


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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS

DURING THE PRECEDING FIVE YEARS:

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $1 Par Value Per Share: 22,320,192 shares outstanding as of May 24, 2022.

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TABLE OF CONTENTS

SANDERSON FARMS, INC. AND SUBSIDIARIES


PART I. FINANCIAL INFORMATION		3
Item 1.	Financial Statements (Unaudited)	3
	Condensed consolidated balance sheets—April 30 , 2022 and October 31, 2021	3
	Condensed consolidated statements of operations—Three and six months ended April 3 0 , 2022 and 2021	4
	Condensed consolidated statements of stockholders' equity—Three an d six months ended April 30 , 2022 and 2021	5
	Condensed consolidated statements of cash flows—Six months ended April 3 0 , 2022 and 2021	6
	Notes to condensed consolidated financial statements—April 3 0 , 2022	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	29
PART II. OTHER INFORMATION		29
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 6.	Exhibits	32
INDEX TO EXHIBITS		33
SIGNATURES		34

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SANDERSON FARMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except number of shares)


	April 30, 2022		October 31, 2021
	(Unaudited)		(Note 1)
Assets
Current assets:
Cash and cash equivalents	$	829,124	$	439,339
Accounts receivable, net	260,438		223,865
Receivable from insurance companies	—		2,057
Inventories	434,458		350,959
Refundable income taxes	—		7,418
Prepaid expenses and other current assets	67,375		62,632
Total current assets	1,591,395		1,086,270
Property, plant and equipment, net	1,208,826		1,224,334
Right of use assets	20,618		28,238
Other assets	5,675		6,191
Total assets	$	2,826,514	$	2,345,033
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	169,621	$	152,421
Dividends payable	9,821		—
Accrued expenses	86,126		144,453
Lease liabilities	9,120		12,189
Accrued income taxes	13,159		—

Total current liabilities	287,847		309,063

Claims payable and other liabilities	13,203		13,078
Deferred income taxes	155,752		156,531
Long-term lease liabilities	11,570		16,122
Commitments and contingencies
Stockholders’ equity:
Preferred Stock:
Series A Junior Participating Preferred Stock, $100 par value: authorized 500,000 shares, none issued
Par value to be determined by the Board of Directors: authorized 4,500,000 shares; none issued
Common Stock, $1 par value: authorized 100,000,000 shares; issued and outstanding shares—22,320,192 and 22,329,731 at April 30, 2022 and October 31, 2021, respectively	22,320		22,330
Paid-in capital	119,077		105,517
Retained earnings	2,216,745		1,722,392
Total stockholders’ equity	2,358,142		1,850,239
Total liabilities and stockholders’ equity	$	2,826,514	$	2,345,033

See notes to condensed consolidated financial statements.

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SANDERSON FARMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share amounts)


	Three Months Ended April 30,				Six Months Ended April 30,
	2022		2021		2022		2021
Net sales	$	1,539,714	$	1,133,880	$	2,867,142	$	2,043,186
Cost and expenses:
Cost of sales	1,051,845		941,936		2,059,899		1,781,258

Selling, general and administrative	66,382		64,245		132,120		120,844
	1,118,227		1,006,181		2,192,019		1,902,102
Operating income	421,487		127,699		675,123		141,084
Other income (expense):
Interest income	67		—		164		—
Interest expense	(567)		(697)		(1,144)		(1,335)
Other	3		13		6		16
	(497)		(684)		(974)		(1,319)
Income before income taxes	420,990		127,015		674,149		139,765
Income tax expense	99,800		30,104		160,152		33,376
Net income	$	321,190	$	96,911	$	513,997	$	106,389
Earnings per share:
Basic	$	14.39	$	4.34	$	23.03	$	4.76
Diluted	$	14.39	$	4.34	$	23.03	$	4.76
Dividends per share	$	0.44	$	0.44	$	0.88	$	0.88

See notes to condensed consolidated financial statements.

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SANDERSON FARMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

(In thousands, except shares and per share amounts)


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


Fiscal Year 2022	Common Stock			Paid-In Capital		Retained Earnings		Total Stockholders’ Equity
	Shares	Amount
Balance at October 31, 2021	22,329,731	$	22,330	$	105,517	$	1,722,392	$	1,850,239
Net income - first quarter 2022	—	—		—		192,807		192,807
Cash dividends ($0.44 per share)	—	—		—		(9,823)		(9,823)
Stock compensation plan transactions	(5,665)	(6)		(2,267)		—		(2,273)
Amortization of unearned compensation	—	—		7,883		—		7,883
Balance at January 31, 2022	22,324,066	$	22,324	$	111,133	$	1,905,376	$	2,038,833
Net income - second quarter 2022	—	—		—		321,190		321,190
Cash dividends ($0.44 per share)	—	—		—		(9,821)		(9,821)
Stock compensation plan transactions	(3,874)	(4)		(4)		—		(8)
Amortization of unearned compensation	—	—		7,948		—		7,948
Balance at April 30, 2022	22,320,192	$	22,320	$	119,077	$	2,216,745	$	2,358,142

See notes to condensed consolidated financial statements.

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SANDERSON FARMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)


	Six Months Ended April 30,
	2022		2021
Operating activities
Net income	$	513,997	$	106,389
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	86,523		81,618
Amortization of share-based compensation	16,702		5,751


Deferred income taxes	(779)		3,681
Loss on asset disposals	58		46
Change in assets and liabilities:
Accounts receivable - trade	(36,573)		(41,324)
Accounts receivable - insurance	2,057		(3,951)
Income taxes	20,576		21,458
Inventories	(83,499)		(57,435)
Prepaid expenses and other assets	(4,732)		41
Right of use assets	7,621		8,587
Lease liabilities	(7,621)		(8,587)
Accounts payable	19,560		23,209
Accrued expenses and other liabilities	(59,011)		4,092
Total adjustments	(39,118)		37,186
Net cash provided by operating activities	474,879		143,575
Investing activities
Capital expenditures	(73,134)		(86,345)
Net proceeds from sale of property and equipment	206		452
Net cash used in investing activities	(72,928)		(85,893)
Financing activities



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

Proceeds from issuance of restricted stock under stock compensation plans	656		523
Payments from issuance of common stock under stock compensation plans	(2,999)		(2,655)
Dividends paid	(9,823)		(9,823)
Net cash provided by (used in) financing activities	(12,166)		16,168
Net change in cash and cash equivalents	389,785		73,850
Cash and cash equivalents at beginning of period	439,339		49,061
Cash and cash equivalents at end of period	$	829,124	$	122,911
Supplemental disclosure of non-cash investing and financing activities:
Capital expenditures included in accounts payable	$	2,770	$	5,117
Dividends payable	$	9,821	$	9,826

See notes to condensed consolidated financial statements.

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SANDERSON FARMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

April 30, 2022

NOTE 1—ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair presentation have been included. Operating results for the three and six months ended April 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending October 31, 2022.

The condensed consolidated balance sheet at October 31, 2021 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, reference is made to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for its fiscal year ended October 31, 2021.

New Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Accounting Standards Codification 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2020, our fiscal 2022. We adopted this guidance during the first quarter of fiscal 2022, and adoption did not materially affect our consolidated financial statements.

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

NOTE 2—REVENUE

Revenue Recognition

The Company recognizes revenue in connection with a contract in which the Company has agreed to sell, and a customer has agreed to purchase, specific quantities of product at agreed-upon prices and when the Company's performance obligation related to that contract has been satisfied. In the majority of its contracts with customers, the Company's performance obligation is satisfied when delivery of the product has occurred, either at the customer's facility or the Company's facility, depending on the terms of each contract. In a smaller number of contracts, ownership of the product passes from the Company to the customer at some point during transit, at which time the performance obligation is satisfied and revenue is recognized. Revenue and related receivables are recognized based on the transaction price within the contract and are reduced by estimated or known amounts for items such as rebates, discounts, cooperative advertising allowances and other various items.

The cost incurred for shipping and handling activities to deliver the product to the customer is recognized in cost of sales during the period in which the corresponding revenue is recognized. Where shipping and handling activities occur after the customer has obtained control of the product, the Company has elected to account for those expenses as fulfillment costs in cost of sales, rather than an additional promised service. Revenue is reported gross of any freight charge that is separately invoiced to a customer, and all freight costs are accounted for as cost of sales.

Due to the nature of our contracts, commissions associated with such contracts provide only a short-term benefit (i.e. less than one year); therefore, we recognize costs of commissions paid to third-party brokers as selling, general and administrative expenses.

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Disaggregation of Revenue

The following tables disaggregate our net sales by product category:


Product Category	Three Months Ended April 30, 2022		Three Months Ended April 30, 2021
	(in thousands)
Fresh, vacuum-sealed chicken	$	584,707	$	428,661
Fresh, chill-packed chicken	474,228		387,328
Fresh, ice-packed chicken	318,647		193,757
Frozen chicken	78,677		71,924
Prepared chicken	75,585		46,498
Other	7,870		5,712
Total net sales	$	1,539,714	$	1,133,880


Product Category	Six Months Ended April 30, 2022		Six Months Ended April 30, 2021
	(in thousands)
Fresh, vacuum-sealed chicken	$	1,104,338	$	722,779
Fresh, chill-packed chicken	901,419		763,580
Fresh, ice-packed chicken	547,772		325,438
Frozen chicken	159,301		135,327
Prepared chicken	139,841		85,413
Other	14,471		10,649
Total net sales	$	2,867,142	$	2,043,186

NOTE 3—INVENTORIES

Inventories consisted of the following:


Inventory type	April 30, 2022		October 31, 2021
	(in thousands)
Live poultry-broilers and breeders	$	279,301	$	229,245
Feed, eggs and other	77,209		57,994
Processed poultry	38,696		42,775
Prepared chicken	28,611		11,157
Packaging materials	10,641		9,788
Total Inventories	$	434,458	$	350,959

NOTE 4—PROPERTY, PLANT AND EQUIPMENT

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


Description	April 30, 2022		October 31, 2021
	(in thousands)
Land and buildings	$	984,721	$	976,012
Machinery and equipment	1,476,116		1,439,762
Work-in-process	33,099		19,924
	2,493,936		2,435,698
Less accumulated depreciation	(1,285,110)		(1,211,364)
Property, plant and equipment, net	$	1,208,826	$	1,224,334

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NOTE 5—STOCK COMPENSATION PLANS

Refer to Note 10 and Note 11 of the Company’s October 31, 2021 audited financial statements in the Company's 2021 Annual Report on Form 10-K for further information on our employee benefit plans and stock based compensation plans, respectively. Total stock based compensation expense during the three and six months ended April 30, 2022 was $8.3 million and $16.7 million, respectively, as compared to total stock based compensation expense of $3.1 million and $5.8 million, respectively, for the three and six months ended April 30, 2021.

During the six months ended April 30, 2022, participants in the Company’s Management Share Purchase Plan ("MSPP") elected to receive a total of 3,443 shares of restricted stock at an average price of $190.64 per share instead of a specified percentage of their cash compensation, and the Company issued 824 matching restricted shares. During the three and six months ended April 30, 2022, the Company recorded compensation expense for the MSPP shares, included in the total stock based compensation expense above, of $70,000 and $128,000, respectively, as compared to $125,000 and $200,000, respectively, during the three and six months ended April 30, 2021. Pursuant to the Agreement and Plan of Merger with Walnut Sycamore Holdings LLC, a Delaware limited liability company (“Parent”), Sycamore Merger Sub LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of Parent (“Merger Sub”), and solely for purposes of certain provisions specified therein, Wayne Farms LLC, a Delaware limited liability company (the “Merger Agreement”), no new cash compensation reduction elections under the MSPP may be made after August 8, 2021, and no participants may increase their cash compensation reduction elections under the MSPP after August 8, 2021.

During fiscal 2020 and 2021, the Company entered into performance share agreements that grant certain officers and key employees the right to receive shares of the Company's common stock, subject to the Company's achievement of certain performance measures. The performance share agreements specify a target number of shares that a participant can receive based upon the Company's average return on equity and average return on sales, as defined, during a two-year performance period beginning November 1 of each performance period. Although the performance share agreements have a two-year performance period, there is an additional one-year period during which the participant must remain employed by the Company before the shares are paid out. If the Company's average return on equity and average return on sales meet or exceed certain threshold amounts for the performance period, participants will receive 50 percent to 200 percent of the target number of shares, depending upon the Company's level of performance. Accruals for performance shares begin during the period management determines that achievement of the applicable performance based criteria is probable at some level. In estimating the probability of the number of shares that will be awarded, the Company considers, among other factors, current and projected grain costs and chicken volumes and pricing, as well as the amount of the Company's commitments to procure grain at a fixed price throughout the performance period. Due to the high level of volatility of these commodity prices and the impact that the change in pricing can have on the Company's results, the Company's assessment of probability can change from period to period and can result in significant revisions to the amounts accrued related to the arrangements, as the accruals are adjusted using the cumulative catch-up method of accounting.

The target number of shares specified in the performance share agreements executed on November 1, 2020 totaled 87,350. During the first quarter of fiscal 2022, the Company determined that achievement of the applicable performance based criteria for the November 1, 2020 agreements was probable at a level between threshold and target for the return on equity criteria and at a level between target and maximum for the return on sales criteria. Accordingly, the quarter ended January 31, 2022 includes compensation expense of $5.1 million, included in the total stock based compensation expense above, related to the agreements executed on November 1, 2020. During the second quarter of fiscal 2022, the Company determined that achievement of the applicable performance based criteria for the November 1, 2020 agreements is probable at the maximum level for both the return on sales and return on equity criteria. Due to the revision to the initial determination of probability, the Company recorded an additional catch-up accrual during the second quarter of fiscal 2022. Accordingly, the three months ended April 30, 2022 includes compensation expense of $5.9 million, included in the total stock based compensation expense above, as compared to no compensation expense related to those same agreements recorded during the quarter ended April 30, 2021.

As of April 30, 2022, the aggregate number of shares estimated to be awarded related to the performance share agreements entered into on November 1, 2020 totaled 167,306 shares. The actual number of shares that can be awarded for those agreements could change materially from that estimate due to the Company's actual performance during the remaining six months of the performance period ending October 31, 2022, and due to potential forfeitures. The Company will recognize the remaining unearned compensation related to these agreements over the remaining service period, which ends on October 31, 2023.

The Company also has performance share agreements in place with certain officers and key employees that were entered into on November 1, 2019. The target number of shares specified in those agreements totaled 56,575. The Company has determined that shares covered by these agreements have been earned at a level between the threshold and target for the portion

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dependent upon return on equity criteria and at a level between target and maximum for the portion dependent upon return on sales criteria. Accordingly, the quarter ended April 30, 2022 includes compensation expense of $659,000 related to those agreements, included in the total stock based compensation expense above, as compared to no compensation expense related to those agreements recorded during the quarter ended April 30, 2021. There was no compensation expense recorded during the second quarter of fiscal 2021 related to these agreements, because the Company first determined it was probable that some portion of these shares would be earned during the third quarter of fiscal 2021. As of April 30, 2022, the aggregate number of shares estimated to be awarded related to the performance share agreements entered into on November 1, 2019 totaled 59,642 shares. Since the performance period for these agreements has ended, the actual number of shares that will be awarded can change only due to potential forfeitures during the remaining six months of the service period ending October 31, 2022. The Company will recognize the remaining unearned compensation related to these agreements over the remaining service period.

Typically, the Company would have also entered into performance share agreements dated November 1, 2021, with its officers and key employees, but covenants in the Merger Agreement prohibited the Company from doing so.

The Company's compensation expense related to performance share agreements is summarized as follows (in thousands, except number of shares):


		Three Months Ended				Six Months Ended
Date of Performance Share Agreement	Number of shares issued (actual (a) or estimated (e))	April 30, 2022		April 30, 2021		April 30, 2022		April 30, 2021
November 1, 2019	59,642 (e)	$	659	—		$	1,540	—
November 1, 2020	167,306 (e)	5,907		—		11,044		—
Total performance share compensation expense		$	6,566	$	—	$	12,584	$	—

The Company has unvested restricted stock grants outstanding that were granted during prior fiscal years to its officers, key employees and outside directors. The aggregate number of shares outstanding at April 30, 2022 related to all unvested restricted stock grants totaled 220,167. During the three and six months ended April 30, 2022, the Company recorded compensation expense, included in the total stock based compensation expense above, of $1.7 million and $4.0 million, respectively, related to restricted stock grants, as compared to $3.0 million and $5.6 million, respectively, during the three and six months ended April 30, 2021. The Company had $11.2 million in unrecognized share-based compensation expense as of April 30, 2022, which will be recognized over a weighted average remaining vesting period of approximately 1 year, 7 months. Typically, the Company would have made new restricted stock grants to its officers and key employees effective on November 1, 2021, but covenants in the Merger Agreement prohibited the Company from doing so.

NOTE 6—EARNINGS PER SHARE

Certain share-based payment awards described in Note 5 - Stock Compensation Plans above entitling holders to receive non-forfeitable dividends before vesting are considered participating securities and thus are included in the calculation of basic earnings per share, to the extent they are dilutive. These awards are included in the calculation of basic earnings per share under the two-class method. The two-class method allocates earnings for the period between common shareholders and other security holders. The participating awards receiving dividends are allocated the same amount of income as if they were vested shares.

The following tables present earnings per share:


			Three Months Ended
			April 30, 2022

SEC Form 10-Q filed by Sanderson Farms Inc.