UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
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For the quarterly period ended April 30, 2008
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ____________to____________
Commission file number
1-14977
(Exact name of registrant as specified in its charter)
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Mississippi
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64-0615843
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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127 Flynt Road, Laurel, Mississippi
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39443
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(Address of principal executive offices)
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(Zip Code)
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(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large Accelerated filer
o
Accelerated filer
x
Non-accelerated filer
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Smaller reporting company
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 issuers classes of common stock, as of the latest practicable date. Common
Stock, $1 Par Value Per Share: 20,275,626 shares outstanding as of April 30, 2008.
INDEX
SANDERSON FARMS, INC. AND SUBSIDIARIES
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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April 30,
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October 31,
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2008
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2007
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(Unaudited)
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(Note 1)
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(In thousands)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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6,759
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$
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2,623
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Accounts receivable, net
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76,121
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69,484
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Refundable income taxes
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4,488
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1,102
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Inventories
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172,698
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119,258
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Prepaid expenses and other current assets
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18,043
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14,734
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Total current assets
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278,109
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207,201
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Property, plant and equipment
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699,815
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674,018
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Less accumulated depreciation
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(301,590
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)
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(283,328
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)
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398,225
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390,690
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Other assets
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2,728
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2,482
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Total assets
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$
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679,062
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$
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600,373
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Current liabilities:
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Accounts payable and accrued expenses
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$
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98,953
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$
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78,697
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Current maturities of long-term debt
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462
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455
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Total current liabilities
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99,415
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79,152
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Long-term debt, less current maturities
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146,471
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96,623
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Claims payable
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4,100
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3,700
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Deferred income taxes
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15,245
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16,352
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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, $1 par value: authorized
100,000,000 shares; issued and
outstanding shares 20,275,626 and
20,239,111 at April 30, 2008 and October
31, 2007, respectively
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20,276
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20,239
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Paid-in capital
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27,344
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24,719
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Retained earnings
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366,211
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359,588
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Total stockholders equity
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413,831
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404,546
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Total liabilities and stockholders equity
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$
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679,062
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$
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600,373
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See notes to condensed consolidated financial statements.
3
SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
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Three Months Ended
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Six Months Ended
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April 30,
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April 30,
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2008
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2007
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2008
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2007
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(In thousands, except per share amounts)
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Net sales
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$
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433,876
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$
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360,471
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$
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796,442
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$
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653,182
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Cost and expenses:
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Cost of sales
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409,250
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303,764
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746,389
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587,437
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Selling, general and administrative
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14,146
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12,988
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27,951
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25,455
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423,396
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316,752
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774,340
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612,892
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OPERATING INCOME
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10,480
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43,719
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22,102
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40,290
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Other income (expense):
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Interest income
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23
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61
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95
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107
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Interest expense
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(1,806
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(1,266
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(3,854
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(2,486
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Other
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24
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7
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41
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11
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(1,759
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(1,198
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(3,718
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(2,368
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INCOME BEFORE INCOME TAXES
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8,721
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42,521
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18,384
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37,922
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Income tax expense
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2,504
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15,590
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5,945
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13,840
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NET INCOME
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$
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6,217
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$
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26,931
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$
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12,439
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$
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24,082
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Earnings per share:
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Basic
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$
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.31
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$
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1.34
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$
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.61
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$
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1.20
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Diluted
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$
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.30
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$
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1.33
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$
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.61
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$
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1.19
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Dividends per share
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$
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.14
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$
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.12
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$
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.28
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$
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.24
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Weighted average shares outstanding:
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Basic
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20,269
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20,120
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20,254
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20,111
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Diluted
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20,469
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20,267
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20,443
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20,223
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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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Six Months Ended
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April 30
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2008
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2007
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(In thousands)
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Operating activities
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Net income
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$
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12,439
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$
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24,082
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Adjustments to reconcile net income to net cash provided by (used in) operating activities:
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Depreciation and amortization
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20,543
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16,658
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Non-cash stock compensation
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1,855
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1,665
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Provision for losses on accounts receivable
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220
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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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(6,857
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)
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(20,982
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)
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Inventories
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(53,440
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(19,007
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Other assets
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(8,147
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)
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11,905
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Accounts payable, accrued expenses and other liabilities
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17,745
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6,205
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Total adjustments
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(28,081
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)
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(3,556
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)
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Net cash provided by (used in) operating activities
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(15,642
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)
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20,526
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Investing activities
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Capital expenditures
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(28,169
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)
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(67,400
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)
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Net proceeds from sale of property and equipment
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191
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401
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Net cash used in investing activities
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(27,978
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)
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(66,999
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)
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Financing activities
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Principal payments on long-term debt
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(145
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)
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(138
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)
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Net borrowings from revolving line of credit
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50,000
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55,000
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Net proceeds from exercise of stock options and management share purchase plan
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744
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905
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Tax benefit on exercised stock options
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63
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331
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Dividends paid
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(2,906
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)
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(2,467
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)
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Net cash provided by financing activities
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47,756
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53,631
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Net change in cash and cash equivalents
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4,136
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7,158
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Cash and cash equivalents at beginning of period
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2,623
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7,396
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Cash and cash equivalents at end of period
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$
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6,759
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$
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14,554
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Supplemental disclosure of non-cash financing activity:
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Dividends payable
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$
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(2,910
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)
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$
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(2,471
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)
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See notes to condensed consolidated financial statements.
5
SANDERSON FARMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
April 30, 2008
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements. In the opinion of management, all adjustments
consisting of normal recurring accruals considered necessary for a fair presentation have been
included. Operating results for the three and six months ended April 30, 2008 are not necessarily
indicative of the results that may be expected for the year ending October 31, 2008.
The consolidated balance sheet at October 31, 2007 has been derived from the audited consolidated
financial statements at that date but does not include all of the information and footnotes
required by U.S. generally accepted accounting principles for complete financial statements. For
further information, reference is made to the consolidated financial statements and footnotes
thereto included in the Companys annual report on Form 10-K for the year ended October 31, 2007.
NOTE 2INVENTORIES
Inventories consisted of the following:
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April 30,
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October 31,
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2008
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2007
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(In thousands)
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Live poultry-broilers and breeders
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$
|
102,993
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$
|
71,908
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Feed, eggs and other
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24,902
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16,817
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Processed poultry
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30,270
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17,284
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Processed food
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8,945
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7,608
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Packaging materials
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5,588
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|
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5,641
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|
|
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$
|
172,698
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$
|
119,258
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|
Inventories of live poultry, feed and eggs increased primarily as a result of higher feed grain
costs and additional units of inventory required for the new complex in Waco, Texas. As described
below under Critical Accounting Policies and Estimates, the cost of feed grains in live inventories
are accumulated during the growing period.
The increase in processed inventories resulted primarily from additional units of export product
resulting from the timing of export sales and additional units of inventory at the Companys new
complex at Waco, Texas.
NOTE 3STOCK COMPENSATION PLANS
Refer to Note 9 of our October 31, 2007 audited financial statements for further information on our
employee benefit plans and stock compensation plans. Total stock based compensation expense
applicable to the Companys restricted stock grants for the six months ended April 30, 2008 and
April 30, 2007 was $1,855,000 and $1,665,000, respectively.
During the quarter ended April 30, 2008, the Company granted 9,000 shares of restricted stock to
certain directors. The restricted stock had a grant date fair value of $35.78 per share and vests
three years from date of grant.
During the six months ended April 30, 2008, participants in the Companys Management Share Purchase
Plan purchased a total of 19,664 shares of restricted stock at an average price of $34.57 per share
and the Company issued 4,873 matching restricted shares.
During November 2007, the Company granted 36,209 shares of restricted stock to certain officers and
key employees. The restricted stock had a grant date fair value of $34.80 per share and vests four
years from the date of grant.
During the quarter ended January 31, 2008, the Company entered into performance share agreements
that grant certain officers and key employees the right to receive a target number of 67,820 shares
of the Companys common stock, subject to the Companys achievement of certain performance
measures. At April 30, 2008, the Company also had performance share agreements in place with
certain officers and key employees that were entered into in fiscal 2007 and fiscal 2006. The
aggregate target number of shares specified in performance share agreements outstanding as of April
30, 2008 totaled 237,188. Compensation cost of $234,000 was recognized for performance shares
during the six months ended April 30, 2008.
6
NOTE 4 EARNINGS PER SHARE
Basic net income per share was calculated by dividing net income by the weighted-average number of
common shares outstanding during the period. Diluted net income per share 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 and restricted stock outstanding. Restricted stock and
employee stock options representing 200,511 and 188,716 common shares were included in the
calculation of diluted net income per share for the three and six months ended April 30, 2008,
respectively. Restricted stock and employee stock options representing 146,668 and 111,969 common
shares for the three and six months ended April 30, 2007, respectively, were included in the
calculation of diluted net income per share.
NOTE 5NEW ACCOUNTING PRONOUNCEMENTS
On July 13, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109 (Interpretation 48). Interpretation 48
clarifies the accounting for uncertainty in income taxes recognized in a companys financial
statements in accordance with Statement No. 109 and prescribes a recognition threshold and
measurement attribute for financial statement disclosure of tax positions taken or expected to be
taken on a tax return. Additionally, Interpretation No. 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company adopted Interpretation 48 effective November 1, 2007. The Company had no significant
uncertain tax positions at the date of adoption or at April 30, 2008. Accordingly, the adoption
did not have a material effect on the Companys consolidated financial position, results of
operations or cash flows. If interest or penalties are incurred related to uncertain tax
positions, such amounts are recognized in income tax expense. Tax periods for all fiscal years
after 2003 remain open to examination by the federal and state taxing jurisdiction to which the
Company is subject.
In September 2006, the FASB issued SFAS No.157 Fair Value Measurements (SFAS 157). This
standard defines fair value, establishes a framework for measuring fair value in accounting
principles generally accepted in the United States of America and expands disclosure about fair
value measurements. This pronouncement applies whenever other accounting standards require or
permit assets or liabilities to be measured at fair value. Accordingly, this statement does not
require any new fair value measurement. This statement is effective for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. We are currently assessing
the impact of applying SFAS 157 on the Companys consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Liabilities
including an Amendment of FASB Statement No. 115 (SFAS 159). This standard provides companies
with an option to measure, at specified election dates, many financial instruments and certain
other items at fair value. This Statement also establishes presentation and disclosure requirements
designed to facilitate comparisons between entities that choose different measurement attributes
for similar types of assets and liabilities. This statement is effective for fiscal years
beginning after November 15, 2007. We are currently assessing the impact of applying SFAS 159 on
the Companys consolidated financial statements.
NOTE 6 OTHER MATTERS
On June 6, 2006, Annie Collins, a former employee of the processing division subsidiary, on behalf
of herself and as representative of a class of individuals who are similarly situated and who
have suffered the same or similar damages filed a complaint against the Companys processing and
production subsidiaries in the United States District Court for the Eastern District of Louisiana.
Plaintiffs allege that the Companys subsidiaries violated the Fair Labor Standards Act by failing
to pay plaintiffs and other hourly employees for the time spent donning and doffing protective and
sanitary clothing and performing other alleged compensable activities, and that Sanderson
automatically deducted thirty minutes from each workers workday for a meal break regardless of the
actual time spent on break. Plaintiffs also allege that they were not paid overtime wages at the
legal rate. Plaintiffs seek unpaid wages, liquidated damages and injunctive relief.
On July 31, 2006, following various procedural motions, the Company filed its Answer to the
plaintiffs Complaint.
On July 20, 2006, ten current and former employees of the processing division subsidiary filed an
action in the United States District Court for the Eastern District of Louisiana nearly identical
to the one described above. Approximately 3,700 individuals purportedly have given their consent
to be a party plaintiff to both this action and the action described above. Since the filing of
these two complaints, six other substantially similar lawsuits were filed in United States District
Courts for the Jackson and Hattiesburg divisions of the Southern District of Mississippi. Unlike
the two suits referenced above filed in Louisiana (which suits were consolidated into one action),
these complaints are specific to individual processing locations of the processing division
subsidiary of the Company.
7
On March 26, 2007, the parties to the consolidated Louisiana action reached a preliminary
settlement and filed a Joint Motion for Preliminary Approval of Collective Action Settlement and
Appointment of Plaintiffs Counsel as Class Counsel. Although not parties to the Louisiana matter,
the plaintiffs in the Mississippi suits entered into a preliminary settlement agreement and agreed
to be bound by the settlement reached in the Louisiana suit. On April 11, 2007, the Court denied
the joint motion on two grounds: (1) The motion was premature because no motion to certify a
collective action had been filed in the case, and (2) certain contingencies contained in the
settlement agreement gave rise to concerns about whether the settlement agreement was in accordance
with the Fair Labor Standards Act. The parties filed a Joint Motion for Reconsideration of this
order of the Court, which was granted in part and denied in part by order dated May 3, 2007. In the
order, the Court stated it would permit notice to the class to proceed. The Court also stated that
if certain contingencies agreed to by the parties in the settlement agreement concerning class
participation were met, it would consider the reasonableness of the proposed settlement at a
fairness hearing. The parties agreed to proceed in this manner, and the Court authorized the
distribution of notice to the class. At the joint request of the parties, the Court extended the
August 1, 2007 deadline for class members to opt into the lawsuits to September 14, 2007. On
November 15, 2007, following the completion of notice to the class, the Company voided the
settlement agreement because the contingencies in the agreement concerning class participation were
not met. The Court held a settlement conference with the parties on December 5, 2007. At that
conference, the parties agreed to a new tentative settlement on terms substantially similar to the
earlier settlement, but proportionate to the participation elected by the plaintiff group. The
parties agreed to an abbreviated notice period, and are seeking Court approval in order to finalize
the settlement agreement. The abbreviated notice period, which provided additional time for class
members to opt-in to the new tentative settlement, expired on May 10, 2008. As of the end of the
abbreviated notice period, 8,334 purported class members have opted into the settlement, out of a
total possible 20,723 class members. Because the Company has payroll data on only 7,409 of these
purported class members, not all of these individuals may be eligible to participate in the
settlement. On May 11, 2008, the parties filed a joint motion for final approval of settlement, in
which the parties ask the court to enter an order setting a date upon which the court will conduct
a hearing to consider the fairness of the settlement, and to hear any comments from the class.
That motion is pending. The Mississippi cases have been dismissed pending the Courts final
approval of the settlement. Because the Company cannot determine with any certainty the likelihood
of approval of the settlement by the court, no reserve has been established or accrued for this
matter. The Company estimates that if the settlement is approved in its current form, the cost of
the settlement to the Company would be approximately $3.1 million.
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 proceedings 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 Companys 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, of any, for these
matters is made after considerable analysis of each individual case. Because the outcome of these
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 Companys assumptions, the effectiveness of legal strategies, or other factors beyond the
Companys 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 April 30, 2008, and the related condensed consolidated statements of income for the
three-month and six-month periods ended April 30, 2008 and 2007, and the condensed consolidated
statements of cash flows for the six-month periods ended April 30, 2008 and 2007. These financial
statements are the responsibility of the Companys 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 and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the standards
of the Public Company Accounting Oversight Board, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should be made to the
condensed consolidated financial statements referred to above for them to be in conformity with
U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Sanderson Farms, Inc. and
subsidiaries as of October 31, 2007, 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 20, 2007, 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, 2007, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
New Orleans, Louisiana
May 20, 2008
9
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following Discussion and Analysis should be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of Operations included in Item 7 of the Companys
Annual Report on Form 10-K for its fiscal year ended October 31, 2007.
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 Companys 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 collectibility 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 Companys or the industrys 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 Companys
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 Companys 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 Companys 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 Companys poultry operations, including
hatching egg production, hatching, growing, and processing cost, are responsive to efficient cost
containment programs and management practices.
10
The Companys processed and prepared foods product line includes over 75 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. The Companys fiscal 2008 capital budget includes $4.1
million to install equipment necessary to increase the Companys capacity to produce further processed and partially
cooked chicken products. This project will be completed by the Summer of 2008.
On January 12, 2006, the Company announced that sites in Waco and McLennan County, Texas had been
selected for the construction of a new poultry complex, consisting of a processing plant, hatchery
and wastewater treatment facility. The processing plant began processing chickens on August 6,
2007, and is expected to reach full production of approximately 1.25 million head of chickens per
week during the fourth quarter of fiscal 2008.
On April 24, 2008, the Company announced that sites in Kinston, North Carolina had been selected
for construction of a new feed mill, poultry processing plant and hatchery. These facilities will
comprise a state-of-the-art poultry complex with the capacity to process 1.25 million birds per
week for the retail chill pack market. At full capacity the complex will employ approximately
1,500 people, will require 130 contract growers, and will be equipped to process and sell 6.7
million pounds per week of dressed poultry meat at full production. The Company expects to begin
construction of the new facility this summer, with initial operations scheduled to begin during the
fourth quarter of fiscal 2009.
On May 1, 2008, the Company entered into a new revolving credit facility to, among other things,
increase the available credit to $300.0 million, increase the
capital expenditure limits to allow construction of the Kinston,
North Carolina facility, and to change the covenant requiring a minimum debt
to total capitalization ratio to 50% during fiscal 2008, 55% during fiscal 2009 and not to exceed
50% for fiscal 2010 and thereafter. The credit remains unsecured. As of April 30, 2008, the Company was in compliance with all
covenants.
EXECUTIVE OVERVIEW OF RESULTS
Although overall market prices for poultry products were mixed during the first six months of
fiscal 2008 as compared to the first six months of fiscal 2007, the cost of corn and soybean meal
have been at historically high levels during fiscal 2008, resulting in lower margins. The Company
believes that the cost of feed grains will continue to be high and volatile for the remainder of
fiscal 2008, as the demand for corn from ethanol producers is affecting the market prices for both
corn and soybeans. Using fiscal 2008 feed requirements, the Company estimates the cost of feed
grains would be approximately $175.0 million to $180.0 million higher during fiscal 2008 compared
to fiscal 2007 if the Company were to price all of its remaining needs at current market prices.
These higher feed costs would add approximately 7.6 cents per pound to the cost of a pound of
dressed chicken. In order to maintain margins, chicken market prices, which are likewise volatile,
must move in tandem with these higher costs. The Companys
operations performed well during the first half of the year, which
contributed to the Companys ability to remain profitable
despite challenging industry fundamentals.
RESULTS OF OPERATIONS
During the second quarter of fiscal 2008 the Companys net sales were $433.9 million as compared to
$360.5 million during the second quarter of fiscal 2007, an increase of $73.4 million or 20.4%.
The increase resulted from an increase in the pounds of poultry products sold of 27.2%,
attributable primarily to the new complex that began operations during the fourth quarter of fiscal
2007, partially offset by a decrease in the average sales price of poultry products of 2.2%.
Market prices for poultry products were mixed during the second quarter of fiscal 2008 as compared
to the second quarter of fiscal 2007. As measured by a simple average of the Georgia dock price
for whole chickens, prices increased approximately 6.1% in the Companys second quarter of fiscal
2008 compared with the same quarter during fiscal 2007. Bulk leg quarter prices were also higher,
up 3.9% compared with the second quarter of fiscal 2007. However, boneless breast meat, jumbo
wings and tender prices during the second quarter of fiscal 2008 were approximately 10.1%, 15.4%
and 25.4% lower, respectively, as compared to the second quarter of fiscal 2007. Net sales of
prepared food products were $4.5 million lower, or 11.1%, during the three months ended April 30,
2008 as compared to the same three months during fiscal 2007, and resulted from a decrease in the
pounds of prepared food products sold of 5.0 million, or 21.8%, partially offset by a higher
average sales price of 13.7%. The Company is currently removing the
entree operations from its
prepared foods plant to enable that facility to produce individually frozen poultry products and
additional cooked poultry products.
Net sales for the six months ended April 30, 2008 were $796.4 million as compared to $653.2 million
for the six months ended April 30, 2007, an increase of $143.3 million or 21.9%. The increase in
net sales resulted from an increase in the Companys average sales price of 6.4% and an increase in
the pounds of poultry products sold of approximately 16.1%. The additional pounds of poultry
products sold resulted from an increase in the number of chickens produced of 13.6% and an increase
in the average live weight of chickens produced of 4.5%, partially offset by an increase in
inventory of processed chicken. The additional number of chickens processed was primarily the
result of the additional production at the Companys new Waco processing division, which began
operations during the fourth quarter of fiscal 2007 and will reach full capacity of 1,250,000 head
per week during the fourth quarter of fiscal 2008. The new Waco plant is dedicated to the big bird
deboning market and chickens processed at that plant have a higher average live weight than
chickens processed at the Companys chill pack processing locations, resulting in a higher average
live
11
weight of chickens produced in the first six months of 2008 as compared to the first six months of
fiscal 2007. In addition, the Company had a planned decrease in the number of chickens produced
and the average live weight of chickens produced during the first six months of fiscal 2007 in
response to the difficult market environment during the first three months of fiscal 2007. During
the first half of fiscal 2008 as compared to the first half of fiscal 2007 the average sales price
of the Companys poultry products increased 8.2% due to improved market prices of the Companys
poultry products during the first quarter of fiscal 2008 as compared to the first quarter of fiscal
2007. However, the improvement during the first quarter in market prices for poultry products was
partially offset by lower market prices during the second quarter of fiscal 2008 as compared to the
second quarter of fiscal 2007. Market prices for boneless breast, jumbo wings and tenders were
2.8%, 2.9% and 15.6% lower, respectively, while a simple average of the Georgia dock prices for
whole birds and market prices for leg quarters increased 8.5% and 15.4%, respectively, during the
first half of fiscal 2008 as compared to the first half of fiscal 2007. The 8.2% increase in the
Companys average sales price of poultry products was higher than the composite increase of the
various chicken markets because of the decrease during the first half of fiscal 2008 of the
percentage of its sales attributable to export product, which has a lower average selling price
than other products. Pounds sold of prepared food products decreased 15.8% during the first half of
fiscal 2008 as compared to the same period during fiscal 2007, and the average sales price of
prepared food products increased 11.8%. The Company is currently making changes at the prepared
foods plant to increase that facilitys capacity to produce individually frozen poultry products
and cooked poultry products.
Cost of sales during the second quarter of fiscal 2008 increased $105.5 million or 34.7% as
compared to the same quarter during fiscal 2007. Cost of sales of poultry products increased
$112.0 million or 42.4% during the second quarter of fiscal 2008 as compared to the second quarter
of fiscal 2007 and resulted from the additional pounds of poultry products sold, described above,
and higher feed grain costs. A simple average of the Companys cost of corn and soybean meal
during the second quarter of fiscal 2008 as compared to the second quarter of fiscal 2007 reflected
increases of 28.3% and 46.8%, respectively. The Company believes that feed grains will continue to
be high and volatile during the remainder of fiscal 2008 due in part to high demand from ethanol
producers. Cost of sales of the Companys prepared food products decreased $6.5 million or 16.5%
due to the lower market prices for boneless breast meat, which are a major component of the
Companys prepared food products, and a decrease in the pounds of prepared food products sold of
21.8% during the three months ended April 30, 2008 as compared to the three months ended April 30,
2007.
Cost of sales for the six months ended April 30, 2008 increased $159.0 million or 27.1% as compared
to the six months ended April 30, 2007. Cost of sales of poultry products increased $163.9 million
or 31.7% during the first half of fiscal 2008 as compared to the first half of fiscal 2007 and
resulted from the additional pounds of poultry products sold, described above, and higher feed
grain costs. A simple average of the Companys cost of corn and soybean meal during the first half
of fiscal 2008 as compared to the first half of fiscal 2007 reflected increases of 21.7% and 44.4%,
respectively. The Company believes that feed grains will continue to be high and volatile during
the remainder of fiscal 2008 due in part to high demand from ethanol producers. Cost of sales of
the Companys prepared food products decreased $5.0 million or 7.1% due to the lower market prices
for poultry products, which are a major component of the Companys prepared food products, and a
decrease in the pounds of prepared food products sold of 15.8% during the first six months of
fiscal 2008 as compared to the first six months of fiscal 2007.
Selling, general and administrative costs for the three and six months ended April 30, 2008 were
$14.1 million and $27.9 million, as compared to $13.0 million and $25.4 million, respectively, for
the three and six months ended April 30, 2007. The increase in selling, general and administrative
costs of $1.1 million and $2.5 million, respectively, for the three and six months ended April 30,
2008 as compared to the same periods during fiscal 2007 resulted primarily from a planned increase
in advertising expenses and expenses associated with restricted stock granted to certain officers,
directors and key employees. These costs were partially offset by the absence during fiscal 2008
of $1.0 million and $1.3 million in start up costs during the three and six months ended April 30,
2007, respectively, related to the new complex in Waco, Texas.
Operating income during the second quarter of fiscal 2008 was $10.5 million as compared to $43.7
million for the same quarter of fiscal 2007. During the second quarter of fiscal 2008 the Company
was negatively impacted by significantly higher feed costs and lower boneless breast meat prices as
compared to the second quarter of fiscal 2007. Operating income for the first half of fiscal 2008
was $22.1 million as compared to $40.3 million during the first half of fiscal 2007. Although the
overall market prices for poultry products were mixed during the first six months of fiscal 2008 as
compared to the first six months of fiscal 2007, cost of corn and soybean meal have been at
historically high levels during fiscal 2008, resulting in lower margins. The Company believes that
the cost of feed grains will continue to be high and volatile for the remainder of fiscal 2008.
Interest expense during the three and six months ended April 30, 2008 was $1.8 million and $3.9
million, respectively, as compared to $1.3 million and $2.5 million for the same periods during
fiscal 2007. The increase in interest expense resulted from higher outstanding debt during fiscal
2008 as compared to fiscal 2007 and $1.2 million in interest costs capitalized to the cost of
construction of the new Waco, Texas complex during the first half of fiscal 2007. The Company has
not capitalized any interest costs during the first half of fiscal 2008. The impact of higher
outstanding debt and the reduction in capitalized interest on interest expense was somewhat offset
by lower interest rates incurred on borrowings from the Companys revolving credit facility.
The Companys effective tax rate during the second quarter and first half of fiscal 2008 was
28.7% and 32.3%, respectively.
12
The Companys effective tax rate during the second quarter and first half of fiscal 2007 was 36.7%
and 36.5%, respectively. The Companys effective tax rate differs from the statutory federal rate
due to state income taxes, certain nondeductible expenses for federal income tax purposes and tax
credits. The decrease in the effective rate for fiscal 2008 as compared to fiscal 2007 was the
result of higher than originally estimated federal Katrina credits for fiscal 2007 that were
recognized during fiscal 2008. Management anticipates the effective tax rate to be approximately
36.0% for the second half of fiscal 2008.
Net income for the three months ended April 30, 2008 and 2007 was $6.2 million or $.30 per share
and $26.9 million or $1.33 per share, respectively. Net income for the first half of fiscal 2008
was $12.4 million or $.61 per share as compared to $24.1 million or $1.19 per share, respectively.
Liquidity and Capital Resources
The Companys working capital at April 30, 2008 was $178.7 million and its current ratio was 2.8 to
1. This compares to working capital of $128.0 million and a current ratio of 2.6 to 1 as of
October 31, 2007. Working capital increased primarily as a result of increases in inventory
values, which increase was the result of higher feed grain prices and additional inventories for
the new Waco, Texas complex. During the six months ended April 30, 2008, the Company spent
approximately $28.2 million on planned capital projects.
The Companys capital budget for fiscal 2008 is approximately $56.5 million at April 30, 2008,
which includes $17.3 million in operating leases, and will be funded by cash on hand, internally
generated working capital, cash flows from operations and available credit. The fiscal 2008
capital budget includes approximately $4.1 million for installation of equipment necessary to
increase the Companys capacity to produce further processed chicken products and partially cooked
chicken products at the Companys prepared foods division in Jackson, Mississippi, $3.5 million for
additional soybean meal storage at the Companys Texas feed mill and approximately $3.0 million for
freezer renovation at the Companys Collins, Mississippi processing plant. In addition to the
approved budget the Company plans to spend $8.2 million during fiscal 2008 on the new complex in
Kinston, North Carolina.
On April 24, 2008, the Company announced that sites in Kinston, North Carolina have been selected
for construction of a new feed mill, poultry processing plant and hatchery. These facilities will
comprise a state-of-the-art poultry complex with the capacity to process 1.25 million birds per
week for the retail chill pack market. At full capacity the complex will employ approximately
1,500 people, will require 130 contract growers, and will be equipped to process and sell 6.7
million pounds per week of dressed poultry meat at full production. The Company expects to begin
construction of the new facility this summer, with initial operations scheduled to begin during the
fourth quarter of fiscal 2009, and the estimated cost of the complex to be $126.5 million.
On May 1, 2008, the Company entered into a new revolving credit facility to, among other things,
increase the available credit to $300.0 million, increase the
capital expenditure limits to allow construction of the Kinston,
North Carolina facility, and to change the covenant requiring a minimum debt
to total capitalization ratio to 50% during fiscal 2008, 55% during fiscal 2009 and not to exceed
50% for fiscal 2010 and thereafter. The credit remains unsecured. As of April 30, 2008 the Company had borrowed $95.0 million
under the revolving credit facility.
The Company regularly evaluates both internal and external growth opportunities, including
acquisition opportunities and the possible construction of new production assets, and conducts due
diligence activities in connection with such opportunities. The cost and terms of any financing to
be raised in conjunction with any growth opportunity, including the Companys ability to raise debt
or equity capital on terms and at costs satisfactory to the Company, and the effect of such
opportunities on the Companys balance sheet, are critical considerations in any such evaluation.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting standards generally accepted
in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial 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 Companys Summary of Significant Accounting Policies, as described in Note 1 of the Notes to
the Consolidated Financial Statements that are filed with the Companys latest report on Form 10-K,
should be read in conjunction with this Managements Discussion and Analysis of Financial Condition
and Results of Operations. Management believes that the critical accounting policies and estimates
that are material to the Companys 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
13
probable doubtful accounts. In circumstances where management is aware of a specific customers
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 customers ability to
meet its financial obligations to us), our estimates of the recoverability of amounts due us could
be reduced by a material amount, and the allowance for doubtful accounts and related bad debt
expense would increase by the same amount.
Inventories
Processed food and poultry inventories and inventories of feed, eggs, medication and packaging
supplies are stated at the lower of cost (first-in, first-out method) or market. If market prices
for poultry or feed grains move substantially lower, the Company would record adjustments to write
down the carrying values of processed poultry and feed inventories to fair market value, which
would increase the Companys costs of sales.
Live poultry inventories of broilers are stated at the lower of cost or market and breeders at cost
less accumulated amortization. The cost associated with broiler inventories, consisting principally
of chicks, feed, medicine and payments to the growers who raise the chicks for us, are accumulated
during the growing period. The cost associated with breeder inventories, consisting principally of
breeder chicks, feed, medicine and grower payments are accumulated during the growing period.
Capitalized breeder costs are then amortized over nine months using the straight-line method.
Mortality of broilers and breeders is charged to cost of sales as incurred. If market prices for
chickens, feed or medicine or if grower payments increase (or decrease) during the period, the
Company could have an increase (or decrease) in the market value of its inventory as well as an
increase (or decrease) in costs of sales. Should the Company decide that the nine month
amortization period used to amortize the breeder costs is no longer appropriate as a result of
operational changes, a shorter (or longer) amortization period could increase (or decrease) the
costs of sales recorded in future periods. High mortality from disease or extreme temperatures
would result in abnormal charges to cost of sales to write-down live poultry inventories.
Long-Lived Assets
Depreciable long-lived assets are primarily comprised of buildings and machinery and equipment.
Depreciation is provided by the straight-line method over the estimated useful lives, which are 15
to 39 years for buildings and 3 to 12 years for machinery and equipment. An increase or decrease in
the estimated useful lives would result in changes to depreciation expense.
The Company continually evaluates the carrying value of its long-lived assets for events or changes
in circumstances that indicate that the carrying value may not be recoverable. As part of this
evaluation, the Company estimates the future cash flows expected to result from the use of the
asset and its eventual disposal. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset, an impairment loss is
recognized to reduce the carrying value of the long-lived asset to the estimated fair value of the
asset. If the Companys assumptions with respect to the future expected cash flows associated with
the use of long-lived assets currently recorded change, then the Companys 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 Companys total exposure. Management regularly reviews the
assumptions used to recognize periodic expenses. Any resulting adjustments to accrued claims are
reflected in current operating results. If historical experience proves not to be a good indicator
of future expenses, if management were to use different actuarial assumptions, or if there is a
negative trend in the Companys 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 Companys effective tax rate.
14
Contingencies
The Company is a party to a number of legal proceedings as discussed in Item 3 of Part 1 of its
Annual Report on Form 10-K for its fiscal year ended October 31, 2007 and in this quarterly report.
We recognize the costs of legal defense in the periods incurred. A determination of the amount of
reserves required, if any, for these matters is made after considerable analysis of each individual
case. Because the outcome of these cases cannot be determined with any certainty, no estimate of
the possible loss or range of loss resulting from the cases can be made. At this time, the Company
has not accrued any reserve for any of these matters. Future reserves may be required if losses are
deemed probable due to changes in the Companys assumptions, the effectiveness of legal strategies,
or other factors beyond the Companys 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
On July 13, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109 (Interpretation 48). Interpretation 48
clarifies the accounting for uncertainty in income taxes recognized in a companys financial
statements in accordance with Statement No. 109 and prescribes a recognition threshold and
measurement attribute for financial statement disclosure of tax positions taken or expected to be
taken on a tax return. Additionally, Interpretation No. 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company adopted Interpretation 48 effective November 1, 2007. The Company had no significant
uncertain tax positions at the date of adoption or at April 30, 2008. Accordingly, the adoption
did not have a material effect on the Companys consolidated financial position, results of
operations or cash flows. If interest or penalties are incurred related to uncertain tax
positions, such amounts are recognized in income tax expense. Tax periods for all fiscal years
after 2003 remain open to examination by the federal and state taxing jurisdiction to which the
Company is subject.
In September 2006, the FASB issued SFAS No.157 Fair Value Measurements (SFAS 157). This
standard defines fair value, establishes a framework for measuring fair value in accounting
principles generally accepted in the United States of America and expands disclosure about fair
value measurements. This pronouncement applies whenever other accounting standards require or
permit assets or liabilities to be measured at fair value. Accordingly, this statement does not
require any new fair value measurement. This statement is effective for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. We are currently assessing
the impact of applying SFAS 157 on the Companys consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Liabilities
including an Amendment of FASB Statement No. 115 (SFAS 159). This standard provides companies
with an option to measure, at specified election dates, many financial instruments and certain
other items at fair value. This Statement also establishes presentation and disclosure requirements
designed to facilitate comparisons between entities that choose different measurement attributes
for similar types of assets and liabilities. This statement is effective for fiscal years
beginning after November 15, 2007. We are currently assessing the impact of applying SFAS 159 on
the Companys consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is a purchaser of certain commodities, primarily corn and soybean meal, for use in
manufacturing feed for its chickens. As a result, the Companys earnings are affected by changes in
the price and availability of such feed ingredients. Feed grains are subject to volatile price
changes caused by factors described below that include demand, weather, size of harvest,
transportation and storage costs and the agricultural policies of the United States and foreign
governments. The price fluctuations of feed grains have a direct and material effect on the
Companys profitability.
Generally, the Company purchases its corn, soybean meal and other feed ingredients for prompt
delivery to its feed mills at market prices at the time of such purchases. The Company sometimes
will purchase feed ingredients for deferred delivery that typically ranges from one month to twelve
months after the time of purchase. The grain purchases are made directly with our usual grain
suppliers, which are companies in the regular business of supplying grain to end users, and do not
involve options to purchase. Such purchases occur when senior management concludes that market
factors indicate that prices at the time the grain is needed are likely to be higher than current
prices, or where, based on current and expected market prices for the Companys poultry products,
management believes it can purchase feed ingredients at prices that will allow the Company to earn
a reasonable return for its shareholders. Market factors considered by management in determining
whether or not and to what extent to buy grain for deferred delivery include:
15
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Current and predicted weather patterns in the United States, South America, China and
other grain producing areas, as such weather patterns might affect the planting, growing,
harvesting and yield of feed grains;
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The expected size of the harvest of feed grains in the United States and other grain
producing areas of the world as reported by governmental and private sources;
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Current and expected changes to the agricultural policies of the United States and
foreign governments;
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The relative strength of United States currency and expected changes therein as it might
impact the ability of foreign countries to buy United States feed grain commodities;
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The current and expected volumes of export of feed grain commodities as reported by
governmental and private sources;
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The current and expected use of available feed grains for uses other than as livestock
feed grains (such as the use of corn for the production of ethanol, which use is impacted by
the price of crude oil); and
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Current and expected market prices for the Companys poultry products.
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The Company purchases physical grain, not financial instruments such as puts, calls or straddles
that derive their value from the value of physical grain. Thus, the Company does not use
derivative financial instruments as defined by SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. The Company does not enter into any derivative transactions or purchase any
grain-related contracts other than the physical grain contracts described above.
The cost of feed grains is recognized in cost of sales, on a first-in-first-out basis, at the same
time that the sales of the chickens that consume the feed grains are recognized.
The Companys interest expense is sensitive to changes in the general level of U.S. interest rates.
The Company maintains certain of its debt as fixed rate in nature to mitigate the impact of
fluctuations in interest rates. The fair value of the Companys fixed rate debt approximates the
carrying amount at April 30, 2008. Management believes the potential effects of near-term changes
in interest rates on the Companys debt are not material.
The Company is a party to no other market risk sensitive instruments requiring disclosure.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Companys Securities Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms,
and that such information is accumulated and communicated to the Companys management, including
its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
An evaluation was performed under the supervision and with the participation of the Companys
management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of the Companys disclosure controls and procedures. Based on that
evaluation, the Companys management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the Companys disclosure controls and procedures were effective as of April
30, 2008. There have been no changes in the Companys internal control over financial reporting
during the fiscal quarter ended April 30, 2008 that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 6, 2006, Annie Collins, a former employee of the processing division subsidiary, on behalf
of herself and as representative of a class of individuals who are similarly situated and who
have suffered the same or similar damages filed a complaint against the Companys processing and
production subsidiaries in the United States District Court for the Eastern District of Louisiana.
Plaintiffs allege that the Companys subsidiaries violated the Fair Labor Standards Act by failing
to pay plaintiffs and other hourly employees for the time spent donning and doffing protective and
sanitary clothing and performing other alleged compensable activities, and that Sanderson
automatically deducted thirty minutes from each workers workday for a meal break regardless of the
16
actual time spent on break. Plaintiffs also allege that they were not paid overtime wages at the
legal rate. Plaintiffs seek unpaid wages, liquidated damages and injunctive relief.
On July 31, 2006, following various procedural motions, the Company filed its Answer to the
plaintiffs Complaint.
On July 20, 2006, ten current and former employees of the processing division subsidiary filed an
action in the United States District Court for the Eastern District of Louisiana nearly identical
to the one described above. Approximately 3,700 individuals purportedly have given their consent
to be a party plaintiff to both this action and the action described above. Since the filing of
these two complaints, six other substantially similar lawsuits were filed in United States District
Courts for the Jackson and Hattiesburg divisions of the Southern District of Mississippi. Unlike
the two suits referenced above filed in Louisiana (which suits were consolidated into one action),
these complaints are specific to individual processing locations of the processing division
subsidiary of the Company.
On March 26, 2007, the parties to the consolidated Louisiana action reached a preliminary
settlement and filed a Joint Motion for Preliminary Approval of Collective Action Settlement and
Appointment of Plaintiffs Counsel as Class Counsel. Although not parties to the Louisiana matter,
the plaintiffs in the Mississippi suits entered into a preliminary settlement agreement and agreed
to be bound by the settlement reached in the Louisiana suit. On April 11, 2007, the Court denied
the joint motion on two grounds: (1) The motion was premature because no motion to certify a
collective action had been filed in the case, and (2) certain contingencies contained in the
settlement agreement gave rise to concerns about whether the settlement agreement was in accordance
with the Fair Labor Standards Act. The parties filed a Joint Motion for Reconsideration of this
order of the Court, which was granted in part and denied in part by order dated May 3, 2007. In the
order, the Court stated it would permit notice to the class to proceed. The Court also stated that
if certain contingencies agreed to by the parties in the settlement agreement concerning class
participation were met, it would consider the reasonableness of the proposed settlement at a
fairness hearing. The parties agreed to proceed in this manner, and the Court authorized the
distribution of notice to the class. At the joint request of the parties, the Court extended the
August 1, 2007 deadline for class members to opt into the lawsuits to September 14, 2007. On
November 15, 2007, following the completion of notice to the class, the Company voided the
settlement agreement because the contingencies in the agreement concerning class participation were
not met. The Court held a settlement conference with the parties on December 5, 2007. At that
conference, the parties agreed to a new tentative settlement on terms substantially similar to the
earlier settlement, but proportionate to the participation elected by the plaintiff group. The
parties agreed to an abbreviated notice period, and are seeking Court approval in order to finalize
the settlement agreement. The abbreviated notice period, which provided additional time for class
members to opt-in to the new tentative settlement, expired on May 10, 2008. As of the end of the
abbreviated notice period, 8,334 purported class members have opted into the settlement, out of a
total possible 20,723 class members. Because the Company has payroll data on only 7,409 of these
purported class members, not all of these individuals may be eligible to participate in the
settlement. On May 11, 2008, the parties filed a joint motion for final approval of settlement, in
which the parties ask the court to enter an order setting a date upon which the court will conduct
a hearing to consider the fairness of the settlement, and to hear any comments from the class.
That motion is pending. The Mississippi cases have been dismissed pending the Courts final
approval of the settlement. Because the Company cannot determine with any certainty the likelihood
of approval of the settlement by the court, no reserve has been established or accrued for this
matter. The Company estimates that if the settlement is approved in its current form, the cost of
the settlement to the Company would be approximately $3.1 million.
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 proceedings 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 Companys 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, of any, for these
matters is made after considerable analysis of each individual case. Because the outcome of these
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 Companys assumptions, the effectiveness of legal strategies, or other factors beyond the
Companys control. Future results of operations may be materially affected by the creation of or
changes to reserves or by accruals of losses to reflect any adverse determinations of these legal
proceedings.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in the Companys
Form 10-K for the fiscal year ended October 31, 2007.
17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During
its second fiscal quarter, the Company repurchased shares of its
common stock as follows.
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(d) Maximum
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Number (or
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Approximate
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(c) Total Number of
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Dollar Value) of
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Shares (or Units)
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Shares (or Units)
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Purchased as Part
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that May Yet Be
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(a) Total Number of
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(b) Average Price
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of Publicly
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Purchased Under
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Shares (or Units)
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Paid per Share (or
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Announced Plans or
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the Plans or
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Period
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Purchased
1
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Unit)
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Programs
2
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Programs
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February 1, 2008
February 29, 2008
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0
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0
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March 1, 2008
March 31, 2008
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0
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0
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0
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April 1, 2008
April 30, 2008
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3,000
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$35.78
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3,000
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222,000
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Total
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3,000
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$35.78
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3,000
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222,000
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1
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All purchases were made pursuant to the Companys Stock Incentive Plan under which
participants may satisfy tax withholding obligations incurred upon the vesting of restricted stock
by requesting the Company to withhold shares with a value equal to the amount of the withholding
obligation.
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2
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On April 28, 2008, the Company announced that its Board of Directors had approved a
plan under which the Company may repurchase up to 225,000 shares of its common stock over the next
four years.
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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.)
Exhibit 3.7 Bylaws of the Registrant, amended and restated as of December 2, 2004.
(Incorporated by reference to Exhibit 3 filed with the Registrants Current Report on Form 8-K on
December 8, 2004.)
18
Exhibit 10.1*+ Sanderson Farms, Inc. Share Purchase Agreement, as amended effective
April 24, 2008.
Exhibit 10.2 Credit Agreement dated May 1, 2008 among Sanderson Farms, Inc. and Bank of
Montreal, Individually and as Agent for the Banks defined therein. (Incorporated by reference to
Exhibit 10.1 to the Registrants Current Report on Form 8-K
filed on May 2, 2008.)
Exhibit 10.3 Guaranty Agreement dated May 1, 2008 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 Registrants Current Report on Form 8-K filed on
May 2, 2008.)
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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*
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Filed herewith.
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**
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Furnished herewith.
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+
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Compensatory plan or arrangement.
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19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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SANDERSON FARMS, INC.
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(Registrant)
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Date: May 22, 2008
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By:
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/s/ D. Michael Cockrell
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Treasurer and Chief
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Financial Officer
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Date: May 22, 2008
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By:
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/s/ James A. Grimes
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Secretary and Principal
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Accounting Officer
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20
INDEX TO EXHIBITS
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Exhibit
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Number
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Description of Exhibit
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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.)
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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.)
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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 Registrants Current Report
on Form 8-K on December 8, 2004.)
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10.1
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*+
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Sanderson Farms, Inc. Share Purchase Agreement, as amended effective April 24, 2008.
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10.2
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Credit Agreement dated May 1, 2008 among Sanderson Farms, Inc. and Bank of
Montreal, Individually and as Agent for the Banks defined therein. (Incorporated
by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed
on May 2, 2008.)
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10.3
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Guaranty Agreement dated May 1, 2008 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 Registrants Current
Report on Form 8-K filed on May 2, 2008.)
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15
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*
|
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Accountants Letter re: Unaudited Financial Information.
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31.1
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*
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Certification of Chief Executive Officer
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31.2
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*
|
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Certification of Chief Financial Officer
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32.1
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**
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Section 1350 Certification.
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32.2
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**
|
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Section 1350 Certification.
|
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*
|
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Filed herewith.
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**
|
|
Furnished herewith.
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+
|
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Compensatory plan or arrangement
|
21
Exhibit 10.1
SANDERSON FARMS, INC.
SHARE PURCHASE AGREEMENT
(Management Share Purchase Plan)
(Employee Agreement)
This SHARE PURCHASE AGREEMENT (this Agreement), made and entered into as of the ___day of
___, 20___(the Grant Date), by and between ___(the Participant) and
Sanderson Farms, Inc. (together with its subsidiaries and affiliates, the Company), is hereby
amended and restated in its entirety as follows as of the 26
th
day of April, 2007, to
set forth the terms and conditions of an Award of Share Purchase Rights granted pursuant to the
Sanderson Farms, Inc. and Affiliates Stock Incentive Plan, adopted on February 17, 2005 (the
Plan) and this Agreement. Any capitalized term used but not defined herein shall have the meaning
ascribed to such term in the Plan. The term Fiscal Year shall mean the fiscal year of the
Company which begins on November 1 of each calendar year and ends on October 31 of the next
calendar year.
1.
Rights to Purchase Restricted Stock.
(a)
Base Salary Reduction
. The Participant may elect to reduce his base salary by a
specified percentage thereof (not to exceed 15%) and, in lieu of receiving such salary, receive a
number of Shares of the Company, subject to the terms, conditions and restrictions set forth herein
(Restricted Stock), equal to the amount of such salary reduction divided by a dollar amount equal
to the Fair Market Value of a Share on the date on which such Restricted Stock is received. In the
first year of the Participants eligibility to participate in the Plan, an election to reduce the
Participants salary for the period of that initial year of eligibility subsequent to the election
must be made within 30 days after the date that the Participant becomes eligible so to participate
(the Initial Election Deadline). An election so made during the initial year of eligibility
(Initial Salary Election) shall become irrevocable on the Initial Election Deadline and shall be
effective beginning with the first pay period that ends after the Initial Election Deadline. Any
election to reduce salary otherwise payable in a calendar year after the Participants initial year
of eligibility shall be effective beginning with the first pay period that ends after January 1 of
the calendar year next following the calendar year in which such election is made (and shall become
irrevocable on December 31 of the calendar year in which such election is made with respect to the
next calendar year). Any cancellation of, or other change in, any such salary reduction election
shall become effective as of the first pay period ending after January 1 of the calendar year next
following the calendar year in which notice of such cancellation or change is filed (and any such
notice shall become irrevocable on December 31 of the calendar year in which it is filed with
respect to the next calendar year).
Any salary reduction hereunder shall apply ratably to the Participants salary for each pay
period covered by such election. Restricted Stock shall be issued for the account of the
Participant, or allocated to the account of the Participant from Shares previously purchased by the
Company, in respect of such salary reductions on the last business day in each calendar quarter
ending March 31, June 30, September 30 and December 31 (each such date, a Quarterly Allocation
Date). The number of shares of Restricted Stock issued or allocated to the Participant on each
Quarterly Allocation Date shall be based upon the aggregate salary reduction for pay periods ending
since the next preceding Quarterly Allocation Date and the Fair Market Value of a Share on such
later Quarterly Allocation Date. Fractional shares will be issued (or purchased) where necessary.
If a Participant who has elected salary reductions hereunder shall terminate employment before
shares of Restricted Stock are issued or allocated in respect of all such salary reductions, any
salary reduction amounts in respect of which Restricted Stock has not been granted by the date of
Participants termination of employment shall be returned to Participant promptly in cash, subject
to compliance with the requirements of Sections 409A(a)(2) and (3) of the Code.
(b)
Bonus Reduction
. The Participant may also elect to reduce his annual bonus
compensation, if any, by a specified percentage thereof (not to exceed 75%) and, in lieu of
receiving such bonus, receive a number of shares of Restricted Stock equal to the amount of such
bonus reduction divided by a dollar amount equal to the Fair Market Value of a Share on the date on
which such Restricted Stock is received. An election for the bonus payable with respect to the
Fiscal Year ending October 31, 2005 and for the bonus payable with respect to any subsequent Fiscal
Year must be made on or before April 30 of that Fiscal Year (or if such day is not a business day,
then on or before the next preceding business day) and shall become irrevocable on that date with
respect to that Fiscal Year. Any cancellation of, or other change in, any such bonus reduction
election shall become effective with respect to the Fiscal Year in which notice of such
cancellation or change is filed if it is filed on or before April 30 of that Fiscal Year (or, if
such day is not a business day, then on or before the next preceding business day); otherwise, it
shall become effective with respect to the Fiscal Year next following the Fiscal Year in which it
is filed.
1
Restricted Stock shall be issued or allocated to the account of the Participant in respect of
any such bonus reduction on the date that such bonus is otherwise payable.
If a Participant who has elected a bonus reduction hereunder shall terminate employment before
shares of Restricted Stock are issued or allocated in respect of such bonus reduction, such
election shall be deemed canceled and any bonus compensation due to the Participant shall be paid
in cash, subject to compliance with the requirements of Sections 409A(a)(2) and (3) of the Code.
2.
Company Matching Contribution.
For each four shares of Restricted Stock acquired by the Participant pursuant to Section 1
above, whether in respect of base salary or bonus reductions, the Company shall simultaneously
issue or allocate to the account of the Participant, for no additional consideration, one
additional share of Restricted Stock (the Company Match), including fractional shares where
necessary.
3.
Terms of Restricted Stock.
(a) The Restricted Stock is subject to forfeiture as provided herein and, during the
Restriction Period defined below, may not be sold, exchanged, transferred, pledged, hypothecated or
otherwise disposed of by the Participant, other than by will or by the laws of descent and
distribution of the state in which the Participant resides on the date of his death. The period
during which the Restricted Stock is not vested and is subject to transfer restrictions is referred
to herein as the Restriction Period.
(b) Except as otherwise provided in this Agreement or the Plan, each share of Restricted Stock
shall vest and no longer be subject to forfeiture or any transfer restrictions hereunder on the
third anniversary of its acquisition by the Participant, so long as the Participant has remained
continuously employed by the Company from such acquisition date through such third anniversary.
(c) In the event of (i) the Participants termination of employment with the Company by reason
of death or Disability (for purposes of this Section 3, Disability shall have the meaning set
forth in Section 409A(a)(2)(C) of the Code at any time such definition is more restrictive than the
Plan definition of Disability), (ii) his termination of employment with the Company on or after
his attainment of eligibility for retirement (as determined by the Board from time to time), or
(iii) a Change in Control (provided that such Change in Control also constitutes a change in
ownership or effective control of the Company within the meaning of Section 409A(a)(2)(A)(v) of
the Code), any portion of the Restricted Stock that has not vested shall immediately vest and no
longer be subject to forfeiture or any transfer restrictions hereunder; provided that in the case
of a Participant who is a specified employee within the meaning of Section 409A(a)(2)(B) of the
Code, such Restricted Stock shall not vest before the date which is six months after the date of
the Participants separation from service (or, if earlier, the date of his death). If the
Participants employment with the Company is terminated for any other reason, voluntarily or
involuntarily, prior to the expiration of the Restriction Period for any shares of Restricted Stock
acquired pursuant to this Agreement by the Participant, then (X) any portion of the Restricted
Stock acquired by the Participant pursuant to the Company Match that has not vested as of the date
of employment termination shall immediately be forfeited, ownership shall be transferred back to
the Company (and any dividends or other distributions with respect thereto paid to the Participant
shall be returned to the Company) and the Restricted Stock shall become authorized but unissued
Shares, and (Y) any portion of the Restricted Stock acquired by the Participant in respect of
salary or bonus reductions that has not vested as of the date of the employment termination may, at
the Companys option, be repurchased by the Company at the price paid by the Participant for such
Restricted Stock, less the amount of dividends received by the Participant (and the Company may pay
such purchase price in whole or in part by cancellation of any indebtedness owed by the Participant
to the Company). Any such Restricted Stock not so repurchased by the Company will vest on the
third anniversary of its acquisition by the Participant.
(d) If the Board determines in good faith that the Participant has engaged in any Detrimental
Activity during the period that the Participant is employed by the Company or during the two-year
period following the Participants voluntary termination of employment or his termination by the
Company for Cause, then (X) any portion of the Restricted Stock acquired by the Participant
pursuant to the Company Match that has not vested as of the date of the Boards determination shall
immediately be forfeited, ownership shall be transferred back to the Company (and any dividends or
other distributions with respect thereto paid to the Participant shall be returned to the Company)
and the Restricted Stock shall become authorized but unissued Shares, and (Y) any portion of the
Restricted Stock acquired by the Participant in respect of salary or bonus reductions that has not
vested as of the date of the Boards determination may, at the Companys option, be repurchased by
the Company at the price paid by the Participant for such Restricted Stock less the amount of
dividends received by the Participant (and the Company may pay such purchase price in whole or in
part by cancellation of any indebtedness owed by the Participant to the Company). If, at the time
of such determination, shares of Restricted Stock acquired by the Participant pursuant to the
Company Match have already vested, the Participant shall repay to the Company the Fair Market Value
of such Shares as of the date(s) that they were issued or allocated to the Participant (and any
dividends or other distributions with respect thereto paid to the Participant shall be returned to
the Company).
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4.
Registration of Shares.
Certificates representing the number of shares of Restricted Stock purchased from time to time
shall be registered in the Participants name (or an appropriate book entry shall be made).
Certificates, if issued, may, at the Companys option, either be held by the Company in escrow
until the applicable Restriction Period expires or until the restrictions thereon otherwise lapse
and/or be delivered to the Participant and registered in the name of the Participant, bearing an
appropriate restrictive legend that refers to this Agreement and remaining subject to appropriate
stop-transfer orders. The Participant agrees to deliver to the Board, upon request, one or more
stock powers endorsed in blank relating to the Restricted Stock. If and when shares of Restricted
Stock vest and are no longer subject to forfeiture or transfer restrictions, unlegended
certificates for such Restricted Stock shall be delivered to the Participant (subject to Section 8
pertaining to the withholding of taxes and Section 16 pertaining to the Securities Act of 1933, as
amended (the Securities Act)); provided, however, that the Board may cause such legend or legends
to be placed on any such certificates as it may deem advisable under Applicable Law.
If the Company elects to hold certificates in escrow, then it shall deliver to the Participant
not less often than every six months a statement of the aggregate number of shares of Restricted
Stock held for his account and the applicable acquisition dates and purchase prices of shares of
Restricted Stock acquired by the Participant since the last such statement.
5.
Rights as a Stockholder.
Except as otherwise provided in this Agreement or the Plan, during the Restriction Period
applicable to any Restricted Stock, the Participant shall have, with respect to the Restricted
Stock, all of the rights of a stockholder of the Company, including the right to vote the
Restricted Stock and the right to receive any dividends or other distributions with respect
thereto.
6.
Adjustments.
If any change in corporate capitalization, such as a stock split, reverse stock split, stock
dividend, or any corporate transaction such as a reorganization, reclassification, merger or
consolidation or separation, including a spin-off of the Company or sale or other disposition by
the Company of all or a portion of its assets, any other change in the Companys corporate
structure, or any distribution to stockholders (other than a cash dividend) results in the
outstanding Shares, or any securities exchanged therefore or received in their place, being
exchanged for a different number or class of shares or other securities of the Company, or for
shares of stock or other securities of any other corporation, or new, different or additional
shares or other securities of the Company or of any other corporation being received by the holders
of outstanding Shares, then the shares of Restricted Stock acquired pursuant to this Agreement
shall be treated in the same manner as other outstanding Shares of the Company.
7.
Validity of Share Issuance.
Upon the issuance or Restricted Stock pursuant to the terms of this Agreement, such shares of
Restricted Stock will be duly authorized by all necessary corporate action of the Company and will
be validly issued, fully paid and non-assessable.
8.
Taxes and Withholding.
As soon as practicable on or after the date as of which an amount first becomes includible in
the gross income of the Participant for federal income tax purposes with respect to the acquisition
of Restricted Stock pursuant to this Agreement, the Participant shall pay to the Company, or make
arrangements satisfactory to the Company regarding the payment of, or the Company may deduct or
withhold from any cash or property payable to the Participant, an amount equal to all federal,
state, local and foreign taxes that are required by Applicable Law to be withheld with respect to
such includible amount. Notwithstanding anything to the contrary contained herein, the Participant
may, if the Company consents, discharge this withholding obligation by directing the Company to
withhold shares of Restricted Stock having a Fair Market Value on the date that the withholding
obligation is incurred equal to the amount of tax required to be withheld in connection with such
vesting, as determined by the Board
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9.
Notices.
Any notice to the Company provided for in this Agreement shall be in writing and shall be
addressed to it in care of its Secretary at its principal executive offices, and any notice to the
Participant shall be addressed to the Participant at the current address shown on the payroll
records of the Company. Any notice shall be deemed to be duly given if and when properly addressed
and posted by registered or certified mail, postage prepaid.
10.
Legal Construction.
Severability. If any provision of this Agreement is or becomes or is deemed invalid,
illegal or unenforceable in any jurisdiction, or would disqualify the Plan or this Agreement under
any law with respect to which the Plan or this Agreement is intended to qualify, or would cause
base salary or bonus reductions under this Agreement to be includible in a Plan participants gross
income pursuant to Section 409A(a)(1) of the Code, as determined by the Board, such provision shall
be construed or deemed amended to conform to Applicable Law and to qualify the Plan, this Agreement
and the income pursuant hereto for the desired benefits of the laws with which they are intended to
qualify or, if it cannot be construed or deemed amended without, in the determination of the Board,
materially altering the intent of the Plan or the Agreement, it shall be stricken and the remainder
of this Agreement shall remain in full force and effect.
Gender and Number. Where the context admits, words in any gender shall include the other
gender, words in the singular shall include the plural and words in the plural shall include the
singular.
Governing Law. To the extent not preempted by federal law, this Agreement shall be
construed in accordance with and governed by the laws of the State of Mississippi.
11.
Incorporation of Plan.
This Agreement , the Share Purchase Rights awarded pursuant hereto and the Restricted Stock
acquired pursuant hereto are subject to, and this Agreement hereby incorporates and makes a part
hereof, all terms and conditions of the Plan that are applicable to Agreements and Awards generally
and to Share Purchase Rights in particular. The Board has the right to interpret, construe and
administer the Plan, this Agreement and the Share Purchase Rights awarded and the Restricted Stock
acquired pursuant hereto. All acts, determinations and decisions of the Board made or taken
pursuant to grants of authority under the Plan or with respect to any questions arising in
connection with the administration and interpretation of the Plan, including the severability of
any and all of the provisions thereof, shall be in the Boards sole discretion and shall be
conclusive, final and binding upon all parties, including the Company, its stockholders,
Participants, Eligible Participants and their estates, beneficiaries and successors. The
Participant acknowledges that he has received a copy of the Plan.
12.
No Implied Rights.
Neither this Agreement nor the award of Share Purchase Rights nor the acquisition of any
Restricted Stock shall confer on the Participant any right with respect to continuance of
employment or other service with the Company. Except as may otherwise be limited by a written
agreement between the Company and the Participant, and acknowledged by the Participant, the right
of the Company to terminate at will the Participants employment with it at any time (whether by
dismissal, discharge, retirement or otherwise) is specifically reserved by the Company.
13.
Integration.
This Agreement and the other documents referred to herein, including the Plan, or delivered
pursuant hereto, contain the entire understanding of the parties with respect to their subject
matter. There are no restrictions, agreements, promises, representations, warranties, covenants or
undertakings with respect to the subject matter hereof other than those expressly set forth herein
and restrictions imposed by the Securities Act and applicable state securities laws. This
Agreement, including the Plan, supersedes all prior agreements and understandings between the
parties with respect to its subject matter.
14.
Counterparts.
This Agreement may be executed in two or more counterparts, each of which shall be deemed an
original, but which together constitute one and the same instrument.
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15.
Amendments; Termination.
The Board may, at any time, without consent of or receiving further consideration from the
Participant, amend this Agreement and the Restricted Stock acquired pursuant hereto in response to,
or to comply with changes in, Applicable Law. To the extent not inconsistent with the terms of the
Plan, the Board may, at any time, amend this Agreement in a manner that is not unfavorable to the
Participant without the consent of the Participant. The Board may amend this Agreement and the
Restricted Stock acquired pursuant hereto otherwise with the written consent of the Participant.
The Company may suspend or terminate this Agreement at any time, provided that no such
suspension or termination may adversely affect the Participants rights with respect to any
Restricted Stock previously acquired pursuant to this Agreement, unless his written consent is
obtained.
16.
Securities Act.
(a) The issuance and delivery of the Share Purchase Rights to the Participant have been
registered under the Securities Act by a Registration Statement on Form S-8 that has been filed
with the Securities and Exchange Commission (SEC) and has become effective. The Participant
acknowledges receipt from the Company of its Prospectus dated July 27, 2005, relating to the Plan.
(b) If the Participant is an affiliate of the Company, which generally means a director,
executive officer or holder of 10% or more of its outstanding shares, at the time certificates
representing Restricted Stock are delivered to the Participant, such certificates shall bear the
following legend, or other similar legend then being generally used by the Company for certificates
held by its affiliates:
THESE SHARES MUST NOT BE OFFERED FOR SALE, SOLD, ASSIGNED OR TRANSFERRED EXCEPT IN A
TRANSACTION WHICH, IN THE OPINION OF COUNSEL FOR THE ISSUER, IS EXEMPT FROM
REGISTRATION THROUGH COMPLIANCE WITH RULE 144 OR WITH ANOTHER EXEMPTION FROM
REGISTRATION.
The Company shall remove such legend upon request by the Participant if, at the time of such
request, the shares are eligible for sale under SEC Rule 144(k), or any provision that has replaced
it, in the opinion of the Companys counsel.
17.
Arbitration.
Any controversy or claim arising out of or relating to this Share Purchase Agreement shall be
settled by arbitration administered by the American Arbitration Association under its Commercial
Arbitration Rules and judgment upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction thereof.
IN WITNESS WHEREOF, the Participant has executed this Agreement on his own behalf, thereby
representing that he has carefully read and understands this Agreement and the Plan as of the day
and year first written above, and the Company has caused this Agreement to be executed in its name
and on its behalf, all as of the day and year first written above.
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SANDERSON FARMS, INC.
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By:
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Name:
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Title:
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Participant
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