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SAFM > SEC Filings for SAFM > Form 10-Q on 27-Aug-2013All Recent SEC Filings

Show all filings for SANDERSON FARMS INC

Form 10-Q for SANDERSON FARMS INC


27-Aug-2013

Quarterly Report


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, 2012.

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, any of which may affect the value of inventories, the collectability of accounts receivable or the financial integrity of customers, and the ability of the end user or consumer to afford protein.

(3) Changes in the political or economic climate, trade policies, laws and regulations or the domestic poultry industry of countries to which the Company or other companies in the poultry industry ship product, and other changes that might limit the Company's or the industry's access to foreign markets.

(4) Changes in laws, regulations, and other activities in government agencies and similar organizations applicable to the Company and the poultry industry and changes in laws, regulations and other activities in government agencies and similar organizations related to food safety.

(5) Various inventory risks due to changes in market conditions, including, but not limited to, the risk that market values of live and processed poultry inventories might be lower than the cost of such inventories, requiring a downward adjustment to record the value of such inventories at the lower of cost or market as required by generally accepted accounting principles.

(6) Changes in and effects of competition, which is significant in all markets in which the Company competes, and the effectiveness of marketing and advertising programs. The Company competes with regional and national firms, some of which have greater financial and marketing resources than the Company.

(7) Changes in accounting policies and practices adopted voluntarily by the Company or required to be adopted by accounting principles generally accepted in the United States.

(8) Disease outbreaks affecting the production performance and/or marketability of the Company's poultry products, or the contamination of its products.

(9) Changes in the availability and cost of labor and growers.

(10) The loss of any of the Company's major customers.

(11) Inclement weather that could hurt Company flocks or otherwise adversely affect its operations, or changes in global weather patterns that could impact the supply of feed grains.

(12) Failure to respond to changing consumer preferences.

(13) Failure to successfully and efficiently start up and run a new plant or integrate any business the Company might acquire.

Readers are cautioned not to place undue reliance on forward-looking statements made by or on behalf of Sanderson Farms. Each such statement speaks only as of the day it was made. The Company undertakes no obligation to update or to revise any forward-looking statements. The factors described above cannot be controlled by the Company. When used in this report, the words "believes", "estimates", "plans", "expects", "should", "outlook", and "anticipates" and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. Examples of forward-looking statements include statements about management's beliefs about future earnings, production levels, grain prices, supply and demand factors and other industry conditions.

GENERAL

The Company's poultry operations are integrated through its control of all functions relative to the production of its chicken products, including hatching egg production, hatching, feed manufacturing, raising chickens to marketable age ("grow out"), processing, 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.


The Company's prepared chicken product line includes approximately 85 institutional and consumer packaged chicken items that it sells nationally, primarily to distributors and food service establishments. A majority of the prepared chicken items are made to the specifications of food service users.

Sanderson Farms began operations at its new feed mill, poultry processing plant and hatchery on separate sites in Kinston and Lenoir County, North Carolina during the first quarter of fiscal 2011. The Kinston facilities comprise a state-of-the-art poultry complex with the capacity, at full production, to process 1,250,000 birds per week for the retail chill pack market. The facility reached near full capacity during March 2012.

On March 29, 2010, the Company announced intentions to construct a potential second new poultry complex in North Carolina, subject to various contingencies including, among others, obtaining an acceptable economic incentive package from the state and local governments. On August 28, 2012, the Company announced the selection of Nash County, North Carolina, as the site of the new complex, subject to various contingencies. On November 13, 2012, the Company announced that Nash County, North Carolina, would not be the site of the new complex due to various timing issues, but that alternative sites were under consideration. On February 14, 2013, the Company announced that sites in and near Palestine, Texas, had been selected for the new complex, subject to various contingencies. Construction of the new complex remains on hold pending improvements in market fundamentals, including the global supply and price of corn and other feed grains, and final approval of our board of directors to move forward with the project. In addition, before the complex can open, we will need to obtain permits, enter into construction contracts, and complete construction.

On February 23, 2011, the Company entered into a new revolving credit facility to, among other things, increase the available credit to $500.0 million from $300.0 million. On October 4, 2012, the Company and the lenders amended the revolving credit facility. The amendment sets the annual capital expenditure limitation at $55.0 million for each of fiscal years 2013, 2014, and 2015, plus, for each year, up to $10.0 million permitted to be spent in the preceding fiscal year but not actually spent therein. The capital expenditure limitation for fiscal 2013, with the permitted carry over, is $65.0 million. The amendment also permits the Company to spend up to $125.0 million each in capital expenditures on the construction of two new poultry complexes, which expenditures are in addition to the annual limits. Under the facility, the Company may not exceed a maximum debt to total capitalization ratio of 55% from the date of the agreement through October 30, 2014, and 50% thereafter. The Company has a one-time right, at any time during the life of the agreement, to increase the maximum debt to total capitalization ratio then in effect by 5% in connection with the construction of either of two new poultry complexes at locations to be determined by the Company, but within the United States, for the four fiscal quarters beginning on the first day of the fiscal quarter during which the Company gives written notice of its intent to exercise this right. The Company has not exercised this right. The amendment also sets a minimum net worth requirement that at July 31, 2013, was $451.3 million. The total committed credit under the amended facility remains at $500.0 million. The credit remains unsecured and, unless extended, will expire on February 23, 2016.

EXECUTIVE OVERVIEW OF RESULTS

Overall market prices for poultry products improved during the third quarter of fiscal 2013 when compared to the third quarter of fiscal 2012. This improvement was offset, in part, by higher grain costs. Demand for fresh chicken in the retail grocery store and export markets has been stable. The Company expects customer traffic through food service establishments to remain under pressure until employment numbers and consumer confidence improve further. However, average market prices for boneless breast meat improved during the third quarter of fiscal 2013 as compared to the third quarter of fiscal 2012 primarily, we believe, due to the high price of competing proteins, especially beef, and the addition of new chicken menu items at several quick serve restaurant chains and chicken promotions at casual dining establishments.

Beginning in July 2012, the Company experienced historically high prices for both corn and soybean meal due to the impact of drought conditions in the midwestern United States on the quality and quantity of the 2012 corn and soybean crops. Both corn and soybean meal market prices stabilized below the highs they set last August, but remain high relative to historical averages. During the third quarter of fiscal 2013 as compared to the third quarter of fiscal 2012, the average feed cost in broiler flocks processed was 9.6% higher. While the 2013 corn and soybean crops in the United States were planted late as a result of wet weather this past spring, good summer weather has fueled optimism regarding the quantity and quality of this year's grain crops. As a result, the cash market prices for both corn and soybean meal have moved lower as we head into the harvest season. The Company has priced its needs for both corn and soybean meal through August, but has priced none of its needs past August. Had the Company priced its remaining needs for corn and soybean meal at August 23, 2013 cash market prices, costs of feed grains would be approximately $72.0 million higher during fiscal 2013 as compared to fiscal 2012.

In light of challenging market conditions that existed during fiscal 2011 and the beginning of fiscal 2012, the Company reduced production beginning in January 2012 by four percent at all of its facilities except for its new facility in Kinston, North Carolina, which was moving to near full production at the time. The Company announced an additional two percent production cut in August 2012 in light of record high grain costs at the time. In February 2013, the Company announced it would return to full production beginning in June 2013, and the Company is now at full production at all facilities.


RESULTS OF OPERATIONS

Net sales for the third quarter ended July 31, 2013 were $739.0 million as compared to $624.9 million for the third quarter ended July 31, 2012, an increase of $114.1 million or 18.3%. Net sales of poultry products for the third quarter ended July 31, 2013 and 2012, were $712.1 million and $601.1 million, respectively, an increase of $111.1 million or 18.5%. The increase in net sales of poultry products resulted from a 15.4% increase in the average sales price of poultry products sold, and a 2.7% increase in the pounds of poultry products sold. During the third quarter of fiscal 2013, the Company sold 770.8 million pounds of poultry products, up from 750.7 million pounds during the third quarter of fiscal 2012. The increased pounds of poultry products sold resulted from a 1.2% increase in the number of head processed, and a 0.9% increase in the average live weight of poultry processed. Overall, market prices for poultry products increased during the third quarter of fiscal 2013 as compared to the same quarter of fiscal 2012. Urner Barry average market prices increased for boneless breast meat, tenders, and bulk leg quarters during the third quarter of fiscal 2013 as compared to the third quarter of fiscal 2012 by 32.3%, 13.1%, and 1.5%, respectively, while average market prices for jumbo wings decreased by 19.3% for the same period. The average Georgia Dock whole bird market price for the third quarter of fiscal 2013 also showed improvement and increased by approximately 11.6% over third quarter 2012 levels. Net sales of prepared chicken products for the three months ended July 31, 2013 and 2012 were $26.8 million and $23.8 million, respectively, or an increase of 12.9%. This increase resulted from a 4.4% increase in the average sales price of prepared chicken products sold, coupled with an 8.1% increase in the pounds of prepared chicken products sold, from 12.4 million pounds sold during the third quarter of fiscal 2012 to 13.4 million pounds sold during the third quarter of fiscal 2013.

Net sales for the first nine months of fiscal 2013 were $1,955.9 million as compared to $1,737.7 million for the first nine months of fiscal 2012, an increase of $218.2 million, or 12.6%. Net sales of poultry products for the first nine months of fiscal 2013 and 2012 were $1,884.0 million and $1,670.0 million, respectively, an increase of $214.0 million or 12.8%. The increase in net sales of poultry products resulted from a 10.5% increase in the average sales price of poultry products sold and a 2.1% increase in the pounds of poultry products sold. During the first nine months of fiscal 2013 the Company sold 2,209.4 million pounds of poultry products, up from 2,163.1 million pounds during the first nine months of fiscal 2012. The additional pounds of poultry products sold resulted from a 0.9% increase in the average live weight of poultry processed, partially offset by a 0.3% decrease in the number of head processed. Overall, market prices for poultry products increased during the first nine months of fiscal 2013 as compared to the same period during fiscal 2012. Urner Barry average market prices increased for boneless breast meat and tenders during the first nine months of fiscal 2013 as compared to the first nine months of fiscal 2012 by 17.8% and 2.4%, respectively, while the average market prices for bulk leg quarters and jumbo wings decreased by 0.2% and 0.7%, respectively, for the same period. The average Georgia Dock whole bird market price also showed improvement and increased by approximately 10.3%. Net sales of prepared chicken products for the nine months ended July 31, 2013 and 2012 were $71.9 million and $67.8 million, respectively, or an increase of 6.2%. This increase resulted from a 6.0% increase in the average sales price of prepared chicken products sold, and a 0.2% increase in the pounds of prepared chicken products sold from 35.8 million pounds sold during the first nine months of fiscal 2012 to 35.9 million pounds sold during the first nine months of fiscal 2013.

Cost of sales for the third quarter of fiscal 2013 was $605.0 million as compared to $555.2 million during the third quarter of fiscal 2012, an increase of $49.8 million or 9.0%. Cost of sales of poultry products sold during the third quarter of fiscal 2013 as compared to the third quarter of fiscal 2012 was $579.4 million and $532.5 million, respectively, an increase of $46.9 million or 8.8%. As illustrated in the table below, the increase in the cost of sales of poultry products sold resulted from a 9.6% increase in the costs of feed in broilers processed, or $0.0355 per pound, and a 2.7% increase in the pounds of poultry products sold.


                             Poultry Cost of Sales

             (In thousands, except percentages and per pound data)



                                       Third Quarter 2013          Third Quarter 2012              Incr/(Decr)
Description                           Dollars       Per lb.       Dollars       Per lb.      Dollars        Per lb.
Beginning Inventory                  $   27,083     $ 0.4403     $   29,672     $ 0.4764     $ (2,589 )    $ (0.0361 )
Feed in broilers processed           $  315,575     $ 0.4046     $  281,102     $ 0.3691     $ 34,473      $  0.0355
All other cost of sales              $  268,173     $ 0.3438     $  256,528     $ 0.3368     $ 11,645      $  0.0070
Less: Ending Inventory               $   31,434     $ 0.4569     $   34,790     $ 0.4644     $ (3,356 )    $ (0.0075 )

Total poultry cost of sales          $  579,397     $ 0.7517     $  532,512     $ 0.7094     $ 46,885      $  0.0423

Pounds:
Beginning Inventory                      61,514                      62,283
Poultry processed                       779,949                     761,647
Poultry Sold                            770,776                     750,670
Ending Inventory                         68,800                      74,917

Other costs of sales of poultry products include labor, contract grower pay, packaging, freight and certain fixed costs, among other costs. During the third quarter ended July 31, 2013, other costs of sales of poultry products also include approximately $4.1 million of charges related to the Company's bonus award program. These non-feed related costs of poultry products sold increased by $0.0070 per pound processed, or 2.1%, during this year's third fiscal quarter compared to the same quarter a year ago. Costs of sales of the Company's prepared chicken products during the third quarter of fiscal 2013 were $25.6 million as compared to $22.7 million during the same quarter a year ago, an increase of $2.9 million, or 12.7%, primarily attributable to an 8.1% increase in the pounds of prepared chicken sold.

Cost of sales for the nine months ended July 31, 2013 was $1,752.1 million as compared to $1,609.1 million during the nine months ended July 31, 2012, an increase of $143.0 million, or 8.9%. Cost of sales of poultry products sold for the nine months ended July 31, 2013 and 2012 were $1,684.2 million and $1,535.4 million, respectively, an increase of $148.7 million, or approximately 9.7%. As illustrated in the table below, the increase in the cost of sales of poultry products sold resulted from a 12.0% increase in the costs of feed in broilers processed, or $0.0446 per pound, and a 2.1% increase in the pounds of poultry products sold.

                             Poultry Cost of Sales

             (In thousands, except percentages and per pound data)



                                      Nine Months Ended            Nine Months Ended
                                        July 31, 2013                July 31, 2012                 Incr/(Decr)
Description                          Dollars       Per lb.        Dollars       Per lb.       Dollars        Per lb.
Beginning Inventory                $    32,196     $ 0.5052     $    27,892     $ 0.5117     $   4,304      $ (0.0065 )
Feed in broilers processed         $   920,341     $ 0.4152     $   808,905     $ 0.3706     $ 111,436      $  0.0446
All other cost of sales            $   763,062     $ 0.3442     $   742,418     $ 0.3401     $  20,644      $  0.0041
Less: Ending Inventory             $    31,434     $ 0.4569     $    34,790     $ 0.4644     $  (3,356 )    $ (0.0075 )

Total poultry cost of sales (1)    $ 1,684,165     $ 0.7623     $ 1,544,425     $ 0.7140     $ 139,740      $  0.0483

Pounds:
Beginning Inventory                     63,729                       54,508
Poultry processed                    2,216,772                    2,182,842
Poultry Sold                         2,209,357                    2,163,146
Ending Inventory                        68,800                       74,917

Note (1) - Total poultry cost of sales for the nine months ended July 31, 2012
excludes the impact of the $9.0 million live inventory adjustment recorded at October 31, 2011.

Other costs of sales of poultry products include labor, contract grower pay, packaging, freight and certain fixed costs, among other costs. During the nine months ended July 31, 2013, other costs of sales of poultry products also include approximately $4.1 million of charges related to the Company's bonus award program. These non-feed related costs of poultry products sold increased $0.0041 per pound processed, or 1.2%, during the first nine months of fiscal 2013 as compared to the same period a year ago. For the nine months ended July 31, 2013, costs of sales of the Company's prepared chicken products were $68.0 million as compared to $64.7 million during the nine months ended July 31, 2012, an increase of $3.2 million, or 5.0%, primarily attributable to increased costs of raw materials purchased.

The Company recorded the value of live broiler inventories on hand at July 31, 2013 at cost. When market conditions are favorable, the Company values the broiler inventories on hand at cost, and accumulates costs as the birds are grown to a marketable age subsequent to the balance sheet date. In periods where the Company estimates that the cost to grow live birds in inventory to a marketable age, process, and distribute those birds will be higher than the anticipated sales price, the Company will make an adjustment to lower the value of live birds in inventory to the market value. No such charge was required at July 31, 2013 or July 31, 2012.


Selling, general and administrative costs during the three and nine months ended July 31, 2013 were $29.5 million and $69.9 million, respectively. The following table includes the components of selling, general and administrative costs for the three and nine months ended July 31, 2013 and 2012.

                                                          Selling, General and Administrative Costs
                                                                       (in thousands)
                                                          Three Months                    Nine Months
                                                         Ended July 31,                  Ended July 31,
                                                     2013              2012            2013          2012
ESOP expense                                      $     5,500       $     3,100      $  5,500      $  3,100
Stock compensation expense                              3,295             1,277         5,454         3,563
Bonus award program expense                             2,255                 0         2,255             0
Trainee expense                                         1,543             1,012         3,860         3,009
Sanderson Farms Championship expense                      982                 0         1,390             0
Marketing expense                                         532               580         1,616         1,088
Uncollectible accounts                                    104                38           104            38
Nash County, North Carolina expense                         0                 0         1,795             0
All other S,G & A                                      15,294            14,697        47,928        45,974

Total S,G & A                                     $    29,505       $    20,704      $ 69,902      $ 56,772

As illustrated in the table above, the $8.8 million increase in selling, general and administrative costs during the third quarter of fiscal 2013 as compared to the third quarter of fiscal 2012 resulted from a $2.4 million increase in the accrual related to the Company's Employee Stock Ownership Plan, $2.2 million in additional stock compensation expense related to performance share agreements, as described in Note 3 - Stock Compensation Plans above, and $2.3 million expensed for the Company's bonus award program. Contributions in these areas are based on profitability, and accordingly, the accruals recorded for the third quarter of fiscal 2012 were less than those recorded during the third quarter of fiscal 2013. Additionally, the Company's sponsorship of the Sanderson Farms Championship golf tournament held during July resulted in approximately $1.0 million in expenses recognized during the third quarter of fiscal 2013 that were absent during the third quarter of fiscal 2012. During the first nine months of fiscal 2013 as compared to the first nine months of fiscal 2012, selling, general and administrative costs increased $13.1 million, reflecting the increased ESOP, bonus, and performance share accruals, the Sanderson Farms Championship golf tournament, the $1.8 million write off of legal and other costs incurred related to the planned expansion in Nash County, North Carolina, higher wages, increased marketing costs, and increases in various other administrative costs. Regarding the planned construction of a new facility in Nash County, North Carolina, the Company previously capitalized approximately $800,000 in various charges. On November 13, 2012, the Company announced that Nash County, North Carolina, would no longer be considered as a potential site for the new facility. Accordingly, the Company expensed the related charges in the first quarter of fiscal 2013. Additionally, upon determining that Nash County would no longer be considered as a potential site for the new facility, the Company chose to reimburse Nash County and its related economic development organization approximately $1.0 million in legal fees incurred by those entities during the planning phase of the expansion, and those fees were also expensed in the first quarter of fiscal 2013.

The Company's operating income for the three and nine months ended July 31, 2013 was $104.4 million and $133.9 million, respectively, as compared to an operating income for the three and nine months ended July 31, 2012 of $48.9 million and $80.8 million. The increase in operating income resulted from the improvement in market prices of poultry and prepared chicken products during the three and nine months ended July 31, 2013 as compared to the same period a year ago, as described above, partially offset by higher costs of feed grains.

Interest expense during the third quarter and first nine months of fiscal 2013 was $1.4 million and $5.0 million, respectively, as compared to interest expense of $2.0 million and $7.4 million for the same periods in fiscal 2012. The decrease in interest expense resulted primarily from lower outstanding debt during fiscal 2013 as compared to fiscal 2012.

The Company's effective tax rate for the three and nine months ended July 31, 2013 was 34.1% and 33.8%, respectively, as compared to 38.8% for the three and nine months ended July 31, 2012. The Company's effective tax rate for the nine months ended July 31, 2013 includes an approximate 0.4% discrete favorable benefit recognized in the period related to legislation enacted during the first quarter. The Company's effective tax rate differs from the statutory federal rate due to state income taxes, certain nondeductible expenses for federal income tax purposes and certain state and federal tax credits.


During the three and nine months ended July 31, 2013 the Company's net income was $67.9 million, or $2.95 per share, and $85.3 million, or $3.71 per share, respectively. For the three and nine months ended July 31, 2012 the Company's net income was $28.7 million, or $1.25 per share, and $44.6 million, or $1.94 per share, respectively.

Liquidity and Capital Resources

The Company's working capital, calculated by subtracting current liabilities . . .

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