UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________to_______________
Commission file number 0-16567
Sanderson Farms, Inc.
(Exact name of registrant as specified in its charter)
Mississippi 64-0615843
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 North Thirteenth Avenue Laurel, Mississippi 39440
(Address of principal executive offices) (Zip Code)
(601) 649-4030
(Registrant's telephone number, including area code)
Not Applicable
(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 periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days.
Yes X No _____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes _____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $1 Per Share Par Value-----14,367,580 shares outstanding
as of January 31, 1998.
<PAGE>
INDEX
SANDERSON FARMS, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--January 31, 1998 and
October 31, 1997
Condensed consolidated statements of income--Three months
ended January 31, 1998 and 1997
Condensed consolidated statements of cash flows--Three months ended
January 31, 1998 and 1997
Notes to condensed consolidated financial statements--
January 31, 1998
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
January 31, October 31,
1998 1997
(Unaudited) (Note)
(In thousands)
<S> <C> <C>
Assets
Current assets
Cash and temporary cash investments $ 565 $ 1,531
Accounts receivable, net 27,869 30,934
Inventories - Note 2 45,602 44,210
Recoverable income taxes 4,697 2,112
Other current assets 5,792 5,535
Total current assets 84,525 84,322
Property, plant and equipment 314,841 310,721
Less accumulated depreciation (137,855) (132,533)
176,986 178,188
Other assets 2,539 2,383
Total assets $264,050 $264,893
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and
accrued expenses $ 17,946 $ 15,157
Current maturities of long-
term debt 4,018 3,114
Total current liabilities 21,964 18,271
Long-term debt, less current
maturities - Note 4 118,789 118,782
Deferred income taxes 11,069 11,069
Stockholders' equity - Note 5
Preferred Stock:
Series A Junior Participating
Preferred Stock, $100 par value:
authorized 500,000 shares; none issued
Par value to be determined by the
Board of Directors: authorized
4,500,000 shares; none issued
Common Stock, $1 par value: authorized
100,000,000 shares; issued and
outstanding shares - 14,367,580 shares 14,368 14,368
Paid-in capital 11,572 11,447
Retained earnings 86,288 90,956
Total stockholders' equity 112,228 116,771
Total liabilities and stockholders' equity $264,050 $264,893
</TABLE>
NOTE: The balance sheet at October 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. See notes to condensed consolidated financial
statements.
<PAGE>
<TABLE>
SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
<CAPTION>
Three Months Ended
January 31,
1998 1997
(In thousands, except share
and per share data)
<S> <C> <C>
Net sales $113,674 $115,647
Cost and expenses:
Cost of sales 112,764 103,629
Selling, general and
administrative 5,254 5,261
118,018 108,890
OPERATING INCOME(LOSS) (4,344) 6,757
Other income (expense):
Interest income 70 42
Interest expense (2,066) (1,123)
Other 71 49
(1,925) (1,032)
INCOME (LOSS) BEFORE INCOME TAXES (6,269) 5,725
Income tax expense (benefit) (2,319) 2,147
NET INCOME (LOSS) $ (3,950) $ 3,578
Basic and diluted earnings (loss) per share $ (.27) $ .25
Dividends per share $ .05 $ .05
Basic weighted average shares outstanding 14,367,580 14,363,040
Diluted weighted average shares outstanding 14,367,580 14,455,295
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months Ended
January 31,
1998 1997
(In thousands)
<S> <C> <C>
Operating activities
Net income (loss) $(3,950) $ 3,578
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,808 5,070
Change in assets and liabilities:
Decrease in accounts receivable 3,065 1,696
(Increase) decrease in inventories (1,392) 992
(Increase) in refundable income taxes (2,585) -0-
Increase in other assets (581) (1,605)
Increase in accounts payable and
accrued expenses 2,789 2,317
Total adjustments 7,104 8,470
Net cash provided by operating activities 3,154 12,048
Net cash used in investing activities -
capital expenditures (4,438) (17,984)
Financing activities
Principal payments on long-term debt (89) (85)
Net borrowings under revolving line of credit 1,000 4,000
Principal payments received on note receivable
from ESOP 125 -0-
Dividends paid (718) (718)
Net cash provided by financing activities 318 3,197
Net decrease in cash and temporary
cash investments (966) (2,739)
Cash and temporary cash investments
at beginning of period 1,531 4,879
Cash and temporary cash investments
at end of period $ 565 $ 2,140
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
SANDERSON FARMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
January 31, 1998
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with 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 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-month
period ended January 31, 1998, are not necessarily indicative of the results
that may be expected for the year ending October 31, 1998. For further
information, reference is made to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended October 31, 1997.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128,"Earnings per Share". Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants,
and convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
NOTE 2--INVENTORIES
Inventories consisted of the following:
<TABLE>
January 31, October 31,
1998 1997
(In thousands)
<CAPTION>
<S> <C> <C>
Live poultry-broilers and breeders $25,206 $24,980
Feed, eggs and other 6,855 5,790
Processed poultry 4,231 5,238
Processed food 6,308 5,234
Packaging materials 3,002 2,968
$45,602 $44,210
</TABLE>
NOTE 3--INCOME TAXES
Deferred income taxes relate principally to cash basis temporary differences
and depreciation expense which are accounted for differently for financial and
income tax purposes. Effective November 1, 1988, the Company changed from
the cash to the accrual basis of accounting for its farming subsidiary. The
Taxpayer Relief Act of 1997 (the "Act") provides that the taxes on the cash
basis temporary differences as of that date are payable over the next 20 years
or in the first fiscal year in which the Company fails to qualify as a "Family
Farming Corporation". The Company will continue to qualify as a "Family
Farming Corporation" provided there are no changes in ownership control.
Management does not anticipate the payment of such taxes related to these cash
basis temporary differences during fiscal 1998.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following Discussion and Analysis should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Item 7 of the Company's Annual Report on Form 10-K for
its fiscal year ended October 31, 1997.
This Quarterly Report, and other periodic reports filed by the Company under
the Securities and Exchange Act of 1934, and other written oral statements
made by it or on its behalf, may include forward-looking statements, which are
based on a number of assumptions about future events and are subject to
various risks, uncertainties and other factors that may cause actual results
to differ materially from the views, beliefs and estimates expressed in such
statements. These risks, uncertainties and other factors include, but are not
limited to the following:
(1) Changes in the market price for the Company's finished products and feed
grains, both of which may fluctuate substantially and exhibit cyclical
characteristics typically associated with commodity markets.
(2) Changes in economic and business conditions, monetary and fiscal policies
or the amount of growth, stagnation or recession in the global or U.S.
economies, either of which may affect the value of inventories, the
collectability of accounts receivable or the financial integrity of customers.
(3) Changes in laws, regulations, and other activities in government agencies
and similar organizations applicable to the Company and the poultry industry.
(4) Various inventory risks due to changes in market conditions.
(5) Changes in and effects of competition, which is significant in all markets
in which the Company competes with regional and national firms, some of which
have greater financial and marketing resources than the Company.
(6) Changes in accounting policies and practices adopted voluntarily by the
Company or required to be adopted by generally accepted accounting principles.
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 can not be controlled by the Company. When used in this quarterly
report, the words"believes," "estimates," "plans," "expects," "should,"
"outlook," and "anticipates" and similar expressions as they relate to the
Company or its management are intended to identify forward-looking statements.
The Company's poultry operations are integrated through its control of all
functions relative to the production of its chicken products, including
hatching egg production, hatching, feed manufacturing, raising chickens to
marketable age ("grow out"), processing, and marketing. Consistent with the
poultry industry, the Company's profitability is substantially impacted by the
market prices for its finished product and feed grains, both of which may
fluctuate substantially and exhibit cyclical characteristics typically
associated with commodity markets. Other costs, excluding feed grains,
related to the profitability of the Company's poultry operations, including
hatching egg production, hatching, growing, and processing cost, are
responsive to efficient cost containment programs and management practices.
The Company believes that value-added products are subject to less price
volatility and generate higher, more consistent profit margins than whole
chickens ice packed and shipped in bulk form. To reduce its exposure to
market cyclicality that has historically characterized commodity chicken
market prices, the Company has increasingly concentrated on the production and
marketing of value-added product lines with emphasis on product quality,
customer service and brand recognition. Nevertheless, market prices continue
to have a significant influence on prices of the Company's chicken products.
The Company adds value to its poultry products by performing one or more
processing steps beyond the stage where the whole chicken is first saleable as
a finished product, such as cutting, deep chilling, packaging and labeling the
product. The Company believes that one of its major strengths is its ability
to change its product mix to meet customer demands.
The Company's processed and prepared foods product line includes over 200
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.
Results of Operations
Net sales for the first quarter of fiscal 1998 decreased $2.0 million or 1.7%
as compared to the first quarter of fiscal 1997. This reduction in the
Company's net sales resulted from a decrease in the average sale price of the
Company's poultry products of 11.3% and a 7.6% increase in the pounds of
poultry products sold. A simple average of the Georgia dock prices during
these same periods reflect a decrease of approximately 13.3%. During the
first three months of fiscal 1998 the pounds of poultry products sold
increased primarily from additional pounds processed and sold by the new
complex in Brazos and Robertson counties, Texas, which began initial
operations during the second quarter of fiscal 1997. This increase in the
pounds of poultry products from internal expansion was partially offset by a
significant reduction in the pounds of poultry products purchased from
external sources. Market conditions were not as favorable during the first
quarter of fiscal 1998 as compared to the first quarter of fiscal 1997 for the
purchase and further processing of external poultry products. Net sales of
prepared food products increased $2.6 million or 14.9% primarily due to an
increase in the pounds of cooked chicken products produced and sold and a
decrease in the pounds of corn dogs produced and sold. This planned change in
the product mix at the Company's prepared foods division was designed to
improve utilization of assets.
Cost of sales during the three months ended January 31, 1998 as compared to
the three months ended January 31, 1997 increased $9.1 million or 8.8%. The
increase in the cost of sales resulted from the increase in the pounds of
poultry products sold and an increase in the average cost of sales of prepared
food products. A simple average of the corn and soy meal cash market prices
for the first quarter of fiscal 1998 as compared to the first quarter of
fiscal 1997 reflected decreases of 1.5% and 8.8%, respectively. Cost of sales
of prepared food products increased $2.8 million or 18.4% due primarily to the
change in mix mentioned in the previous paragraph.
Selling, general and administrative expenses for the three months ended
January 31, 1998 were approximately the same as compared to the same period
during fiscal 1997.
The Company's operating income decreased $11.1 million for the three months
ended January 31, 1998 as compared to the three months ended January 31, 1997.
Lower market prices for fast food and chill pack poultry products, which is
the primary poultry markets of the Company, are responsible for the reduction
in operating income. In addition, the new complex in Texas was at half
capacity during the first quarter of fiscal 1998 and as expected, has a lower
average return than the Company's other poultry processing plants.
Interest expense increased $.9 million during the three months ended January
31, 1998 as compared to the three months ended January 31, 1997. The increase
in interest expense is primarily related to the funds borrowed to construct
the new complex that is now in operation in Texas. In addition, the Company
incurred capitalized interest costs through the date the complex began
operations in the second quarter of fiscal 1997, which includes $.5 million
capitalized during the first quarter of fiscal 1997. The Company expects
interest expense to be higher for the remainder of fiscal 1998 as compared to
fiscal 1997 due to a full year of interest expense incurred on the new
complex.
The Company's effective tax rate was approximately 37.0% during the first
three months of fiscal 1998 as compared to approximately 37.5% during the
first three months of fiscal 1997.
Liquidity and Capital Resources
As of January 31, 1998 the Company's current ratio and working capital was 3.8
to 1 and $62.6 million, respectively, compared to a current ratio of 4.6 to 1
and working capital of $66.1 million at October 31, 1997. During the first
quarter of fiscal 1998 the Company expended approximately $4.4 million on
planned capital projects. This represents a significant reduction from the
$18.0 million of capital expenditures during the first quarter of fiscal 1997.
As in the first quarter of fiscal 1998, the anticipated capital expenditures
during the remainder of fiscal 1998 will be well below the level during the
same periods in fiscal 1997.
The capital budget for fiscal 1998 was increased to $14.0 million from $12.0
million as of November 1, 1997. The increase of $2.0 million pertains to
items not approved at the beginning of fiscal 1998, pending justification,
field trial and alternate costing. Included in the capital budget for fiscal
1998 is the anticipated cost of the double shift of the new complex in Texas,
approximately $1.9 million relating to fiscal 1997 budget items that were not
completed or started during fiscal 1997, and renovations, changes and
additions to existing processing facilities to allow better product flow and
product mix for more market flexibility.
The Company believes that anticipated capital expenditures for fiscal 1998
will be funded from working capital and by cash flows from operations;
however, if needed, the Company has $32.0 million available under its
revolving credit agreement as of January 31, 1998.
Impact of Year 2000
The Company is continuing to assess the impact of year 2000 on its computer
systems and believes that certain software currently in use will have to be
modified or replaced. The Company estimates the cost of modifications to
existing software and conversions to new software to be approximately $.3
million dollars and will be completed by June 30, 1999. With the
modifications to existing software and conversions to new software, the year
2000 issue will not pose significant operational problems for the Company's
computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the year 2000 issue could have a material
impact on the operations of the Company.
The costs of the projects and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report
Exhibit 15a Independent Accountants' Review Report
Exhibit 15b Accountants' Letter re: Unaudited Financial
Information
(b) The Company did not file any reports on Form 8-K during
the three months ended January 31, 1998.
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.
_____ SANDERSON FARMS, INC. _______
(Registrant)
Date: February 24, 1998 By: /S/D. Michael Cockrell
D. Michael Cockrell
Treasurer and Chief
Financial Officer
Date: February 24, 1998 By:/s/James A. Grimes
James A. Grimes
Secretary and Principal
Accounting Officer
EXHIBIT 15a
INDEPENDENT AUDITORS' REPORT ON REVIEW OF INTERIM
FINANCIAL INFORMATION
Shareholders and
Board of Directors
Sanderson Farms, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Sanderson Farms, Inc. and subsidiaries as of January 31, 1998, and the
related condensed consolidated statements of income (loss) for the three-month
periods ended January 31, 1998 and 1997, and the condensed consolidated
statements of cash flows for the three-month periods ended January 31, 1998
and 1997. These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit in
accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Sanderson Farms, Inc. and
subsidiaries as of October 31, 1997, 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 12, 1997, 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, 1997, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
ERNST & YOUNG LLP
Jackson, Mississippi
February 19, 1998
EXHIBIT 15b
Shareholders and Board of Directors
Sanderson Farms, Inc.
We are aware of the incorporation by reference in Post-Effective Amendment No.
1 to Registration Statement (Form S-No. 33-67474) of Sanderson Farms, Inc.
for the registration of 750,000 shares of its common stock of our report dated
February 19, 1998 relating to the unaudited condensed consolidated interim
financial statements of Sanderson Farms, Inc. that are included in its Form
10-Q for the quarter ended January 31, 1998.
ERNST & YOUNG LLP
Jackson, Mississippi
February 19, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 565
<SECURITIES> 0
<RECEIVABLES> 28118
<ALLOWANCES> 249
<INVENTORY> 45602
<CURRENT-ASSETS> 84525
<PP&E> 314841
<DEPRECIATION> 137855
<TOTAL-ASSETS> 264050
<CURRENT-LIABILITIES> 21964
<BONDS> 118789
0
0
<COMMON> 14368
<OTHER-SE> 97860
<TOTAL-LIABILITY-AND-EQUITY> 264050
<SALES> 113674
<TOTAL-REVENUES> 113674
<CGS> 112764
<TOTAL-COSTS> 112764
<OTHER-EXPENSES> 5254
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2066
<INCOME-PRETAX> (6269)
<INCOME-TAX> (2319)
<INCOME-CONTINUING> (3950)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3950)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
