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SAFM > SEC Filings for SAFM > Form 10-Q on 25-Feb-2014All Recent SEC Filings

Show all filings for SANDERSON FARMS INC

Form 10-Q for SANDERSON FARMS INC


25-Feb-2014

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, 2013.

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.


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The Company's prepared chicken product line includes approximately 130 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.

On February 14, 2013, the Company announced the selection of sites in and near Palestine, Texas, for the construction of its next poultry complex. Construction of the complex began on or about October 1, 2013, and initial operations are expected to commence during the first calendar quarter of 2015. The new complex will consist of a feed mill, hatchery, poultry processing plant and wastewater facility with the capacity to process 1.25 million chickens per week for the big bird deboning market. Before the complex can open we will need to enter into contracts with a sufficient number of growers and complete construction. See "The construction and potential benefits of our new facilities are subject to risks and uncertainties" in the Risk Factors Section of the Company's Annual Report on Form 10-K for its fiscal year ended October 31, 2013.

On October 24, 2013, the Company entered into a new revolving credit facility to, among other things, increase the total committed credit to $600.0 million. The new facility also increases the annual capital expenditure limitation to $65.0 million for fiscal years 2014 through 2018, plus, for each year, up to $10.0 million carryover from the preceding fiscal year, when it is not actually spent in that year. The capital expenditure limitation for fiscal 2014, with the permitted carry over, is $75.0 million. The new facility permits the Company to spend up to $140.0 million each in capital expenditures on the construction of two new poultry complexes to be located anywhere in the United States, which expenditures are in addition to the annual capital expenditure 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 term 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 the two potential new poultry complexes for the four fiscal quarters beginning on the first day of the fiscal quarter during which the Company gives written notice of its intent to exercise this right. The Company has not exercised this right. The amendment also sets a minimum net worth requirement that at January 31, 2014, was $489.4 million. The credit remains unsecured and, unless extended, will expire on October 24, 2018.

EXECUTIVE OVERVIEW OF RESULTS

The Company's margins improved during the first quarter of fiscal 2014 as compared to the first quarter of fiscal 2013 reflecting significantly lower grain prices offset by slightly lower average sales prices for poultry products. Demand for fresh chicken in the retail grocery store market has been stable. Market prices for fresh chicken sold to food service customers moved lower during our first fiscal quarter compared to our first and fourth fiscal quarters of 2013, reflecting the combination of continued sluggish demand from food service customers, increased industry production compared to a year ago, and the impact of adverse weather conditions during the first fiscal quarter of 2014 on restaurant traffic. The Company expects customer traffic through food service establishments to remain under pressure until employment rates and consumer confidence improve further.

Beginning in July 2012, the Company experienced historically high prices for both corn and soybean meal due to the impact on the quality and quantity of the 2012 corn and soybean crops of drought conditions in the Midwestern United States. During fiscal 2013, both corn and soybean meal stabilized below the highs they set in August 2012, but remained high relative to historical averages. While the 2013 United States corn and soybean crops were planted late as a result of wet weather this past spring, cash market prices for both corn and soybean meal moved lower as we moved into the harvest season during our fourth fiscal quarter of 2013 and remained well below last year's prices through the first quarter of fiscal 2014. During the first quarter of fiscal 2014, as compared to the first quarter of fiscal 2013, the average feed cost in broiler flocks processed was 25.1% lower. The Company has priced little of its grain needs past March. Had it priced its remaining fiscal year 2014 needs at February 19, 2014 cash market prices, its costs of feed grains would be approximately $156.4 million lower during fiscal 2014 as compared to fiscal 2013.

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, and continued to operate at six percent below capacity until June 2013, when all facilities were returned to full production.

RESULTS OF OPERATIONS

Net sales for the first quarter ended January 31, 2014, were $584.9 million as compared to $595.8 million for the first quarter ended January 31, 2013, a decrease of $10.9 million or 1.8%. Net sales of poultry products for the first quarter ended January 31, 2014 and 2013, were $558.9 million and $574.2 million, respectively, a decrease of $15.3 million or 2.7%. The decrease in net sales of poultry products resulted from a 2.2% decrease in the average sales price of poultry products sold, and a 0.5% decrease in the pounds of poultry products sold. During the first quarter of fiscal 2014, the Company sold 720.4 million pounds of poultry products, down from


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723.7 million pounds during the first quarter of fiscal 2013. The decreased pounds of poultry products sold resulted from a 2.2% decrease in the number of head processed, partially offset by a 2.6% increase in the average live weight of poultry processed. Overall, market prices for poultry products decreased during the first quarter of fiscal 2014 as compared to the same quarter of fiscal 2013. Urner Barry average market prices decreased for boneless breast meat, tenders, jumbo wings and bulk leg quarters during the first quarter of fiscal 2014 as compared to the first quarter of fiscal 2013 by 4.2%, 0.6%, 40.7% and 15.6%, respectively. The average Georgia Dock whole bird market price for the first quarter of fiscal 2014 showed improvement and increased by approximately 6.5% over first quarter 2013 levels. Net sales of prepared chicken products for the three months ended January 31, 2014 and 2013, were $25.9 million and $21.6 million, respectively, or an increase of 20.2%. This increase resulted from a 24.2% increase in the pounds of prepared chicken products sold, partially offset by a 3.2% decrease in the average sales price of prepared chicken products sold. During the first quarter of fiscal 2014, the Company sold 13.5 million pounds of prepared chicken products, up from 10.9 million pounds sold during the first quarter of fiscal 2013.

Cost of sales for the first quarter of fiscal 2014 was $516.1 million as compared to $584.9 million during the first quarter of fiscal 2013, a decrease of $68.8 million or 11.8%. Cost of sales of poultry products sold during the first quarter of fiscal 2014 as compared to the first quarter of fiscal 2013 was $492.2 million and $564.5 million, respectively, a decrease of $72.3 million or 12.8%. As illustrated in the table below, the decrease in the cost of sales of poultry products sold resulted from a 25.1% decrease in the costs of feed in broilers processed, or $0.1087 per pound, and a 0.5% decrease in the pounds of poultry products sold.

                             Poultry Cost of Sales

                     (In thousands, except per pound data)



                                       First Quarter 2014          First Quarter 2013              Incr/(Decr)
Description                           Dollars       Per lb.       Dollars       Per lb.       Dollars        Per lb.
Beginning Inventory                  $   32,139     $ 0.4736     $   32,196     $ 0.5052     $     (57 )    $ (0.0316 )
Feed in broilers processed              235,813       0.3238        316,174       0.4325       (80,361 )      (0.1087 )
All other cost of sales                 253,575       0.3482        250,071       0.3421         3,504         0.0061
Less: Ending Inventory                   29,323       0.4026         33,896       0.4813        (4,573 )      (0.0787 )

Total poultry cost of sales          $  492,204     $ 0.6833     $  564,545     $ 0.7801     $ (72,341 )    $ (0.0968 )

Pounds:
Beginning Inventory                      67,859                      63,729
Poultry processed                       728,317                     730,999
Poultry Sold                            720,373                     723,696
Ending Inventory                         72,831                      70,420

Other costs of sales of poultry products include labor, contract grower pay, packaging, freight and certain fixed costs, among other costs. Included in these other costs of sales during the first quarter of fiscal 2014, is a loss of approximately $1.0 million incurred by the Company as a result of a fire destroying finished goods at a third-party cold storage facility. These non-feed related costs of poultry products sold increased by $0.0061 per pound processed, or 1.8%, during this year's first fiscal quarter compared to the same quarter a year ago. Excluding the impact of the fire loss, other costs of sales increased by $0.0047 per pound, or 1.4%. Costs of sales of the Company's prepared chicken products during the first quarter of fiscal 2014 were $23.9 million as compared to $20.3 million during the same quarter a year ago, an increase of $3.6 million, or 17.5%, primarily attributable to a 24.2% increase in the pounds of prepared chicken sold.

The Company recorded the value of live broiler inventories on hand at January 31, 2014, 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 and then 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 January 31, 2014, or January 31, 2013.


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Selling, general and administrative costs during the three months ended January 31, 2014, were $23.6 million. The following table includes the components of selling, general and administrative costs for the three months ended January 31, 2014 and 2013.

                                                        Three Months
                                                     Ended January 31,
                                                     2014          2013
            Trainee expense                        $   2,451     $    983
            Stock compensation expense                 1,455        1,055
            Sanderson Farms Championship expense       1,195            0
            Marketing expense                          1,153          530
            Nash County, North Carolina expense            0        1,795
            Start-up expense                             362            0
            All other S,G & A                         16,983       16,202

            Total S,G & A                          $  23,599     $ 20,565

As illustrated in the table above, the $3.0 million increase in selling, general and administrative costs during the first quarter of fiscal 2014 as compared to the first quarter of fiscal 2013 resulted primarily from a $1.8 million increase in marketing and Sanderson Farms Championship expenses, a $1.5 million increase in trainee expenses, a $0.4 million increase in stock compensation expense, and a $0.4 million increase in start-up expenses related to the new Palestine, Texas complex currently under construction. These increases were partially offset by a $1.8 million decrease in expenses related to the previously planned construction of a new facility in Nash County, North Carolina. The Sanderson Farms Championship is a PGA TOUR event for which the Company is committed as the title sponsor for years 2013 through 2016. The 2013 sponsorship agreement was reached during the second fiscal quarter of 2013. Accordingly, no expense was incurred during the first fiscal quarter of 2013. The increase in trainee expense is primarily attributable to an increase in trainee staff, as the Company begins preparation for the start-up of its Palestine, Texas complex. 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 months ended January 31, 2014, was $45.2 million as compared to an operating loss for the three months ended January 31, 2013, of $9.7 million. The increase in operating income as compared to the same period a year ago resulted from the decreased cost of feed grains during the three months ended January 31, 2014, partially offset by the decrease in average sales prices, as described above.

Interest expense during the first quarter of fiscal 2014 was $0.9 million as compared to interest expense of $1.8 million for the same period in fiscal 2013. The decrease in interest expense resulted primarily from lower outstanding debt during the first quarter of fiscal 2014, as compared to the first quarter of fiscal 2013.

The Company's effective tax rate for the three months ended January 31, 2014, was 34.9% as compared to 38.6% for the three months ended January 31, 2013. The Company's effective tax rate for the three months ended January 31, 2013, includes an approximate 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 months ended January 31, 2014, the Company's net income was $28.9 million, or $1.25 per share. For the three months ended January 31, 2013, the Company had a net loss of $6.9 million, or $0.31 per share.

Liquidity and Capital Resources

The Company's working capital, calculated by subtracting current liabilities from current assets, at January 31, 2014, was $281.0 million and its current ratio, calculated by dividing current assets by current liabilities, was 3.4 to
1. The Company's working capital and current ratio at October 31, 2013, were $269.2 million and 2.7 to 1. These measures reflect the Company's ability to meet its short term obligations and are included here as a measure of the Company's short term market liquidity. The Company's principal sources of liquidity during fiscal 2014 include cash on hand at October 31, 2013, cash flows from operations, and funds available under the Company's revolving credit facility. As described below, the Company entered into a new revolving credit facility dated October 24, 2013, to, among other things, increase the available credit to $600.0 million from $500.0 million, and to extend the term from February 2016 to October 2018. As of January 31 and February 24, 2014, the Company had no outstanding draws under the facility and had approximately $13.9 million outstanding in letters of credit, leaving $586.1 million available under the facility.

The Company's cash position at January 31, 2014, and October 31, 2013, consisted of $58.8 million and $85.6 million, respectively, in cash and short-term cash investments. The Company's ability to invest cash is limited by covenants in its revolving credit agreement to short term investments. All of the Company's cash at January 31, 2014, and October 31, 2013, was held in checking accounts and highly liquid, overnight investment accounts maintained at two banks. There were no restrictions on the Company's access to its cash and cash investments, and such cash and cash investments were available to the Company on demand to fund its operations.


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Cash flows provided by operating activities during the three months ended January 31, 2014 and 2013, were $2.8 million and $8.2 million, respectively. Cash flows from operating activities decreased by $5.4 million, resulting primarily from the payment during the first quarter of fiscal 2014 of approximately $21.5 million in bonuses earned under the Company's fiscal 2013 bonus award program, an increase of approximately $16.0 million in cash paid for income taxes and an increase in cash paid to vendors, partially offset by lower costs of feed grains experienced by the Company during the first quarter of fiscal 2014.

Cash flows used in investing activities during the first three months of fiscal 2014 and 2013 were $28.8 million and $11.3 million, respectively. The Company's capital expenditures during the first three months of fiscal 2014 were $28.8 million, including approximately $7.4 million for a new Company aircraft and $8.5 million for construction of the Palestine, Texas complex. Capital expenditures for the first three months of fiscal 2013 were $11.5 million.

Cash flows used in financing activities during the three months ended January 31, 2014 and 2013, were $0.8 million and $0.9 million, respectively. The Company made no change to the net outstanding borrowings under its revolving credit facility in either of the comparative periods.

The Company's capital budget for fiscal 2014, excluding operating leases, is approximately $170.1 million. The 2014 capital budget will be funded by internally generated working capital, cash flows from operations and, as needed, draws under the Company's revolving credit facility. The Company had $586.1 million available under the revolving line of credit at January 31, 2014. The fiscal 2014 capital budget includes approximately $110.0 million for construction of the Company's new Palestine, Texas poultry complex, and the new Company aircraft referred to above. Excluding the budget for the new complex, the fiscal 2014 capital budget is $60.1 million.

The Company has a Form S-3 "shelf" registration statement on file with the Securities and Exchange Commission to register, for possible future sale, shares of the Company's common and/or preferred stock at an aggregate offering price not to exceed $1.0 billion. The stock may be offered by the Company in amounts, at prices and on terms to be determined by the board of directors if and when shares are issued.

On September 19, 2013, the Company announced plans to invest approximately $140.0 million for construction of a new feed mill, hatchery, poultry processing plant and waste water facility on separate sites in Palestine, Anderson County, and Freestone County, Texas. Selection of these sites was announced on February 14, 2013, but plans for construction had been on hold due to uncertainty surrounding grain prices, as well as other contingencies, including obtaining approval from the board of directors to move forward with the project. The new facilities will have the capacity to process 1,250,000 birds per week for the big bird deboning market. At full capacity, the complex will employ approximately 1,150 people, will require approximately 100 contract growers, and will be equipped to process and sell 9.7 million dressed poultry pounds per week. Construction of the complex began in October 2013, and the Company expects initial operations to commence in the first calendar quarter of 2015. Before the complex can open we will need to enter into contracts with a sufficient number of growers and complete construction. See "The construction and potential benefits of our new facilities are subject to risks and uncertainties" in the Risk Factors Section of the Company's Annual Report on Form 10-K for its year ended October 31, 2013.

The Company entered into the new revolving credit facility dated October 24, 2013 to, among other things, increase the available credit to $600.0 million from $500.0 million. The new facility increases the annual capital expenditure limitation from $55.0 million to $65.0 million for fiscal years 2014 through 2018, plus, for each year, up to $10.0 million carryover from the preceding fiscal year, when it is not actually spent in that year. The capital expenditure limitation for fiscal 2014, with the permitted carry over, is $75.0 million. The new facility also permits the Company to spend up to $140.0 million each in capital expenditures on the construction of two new poultry complexes to be located anywhere in the United States, which expenditures are in addition to the annual capital expenditure limits. The $140.0 million limit represents an increase from the $125.0 million limit available under the previous agreement. 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 term 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 the two potential new poultry complexes for the four fiscal quarters beginning on the first day of the fiscal quarter during which the Company gives written notice of its intent to exercise this right. The Company has not exercised this right. The amendment also sets a minimum net worth requirement that at . . .

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