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, 1999.
This Quarterly Report, and other periodic reports filed by the Company under
the Securities and Exchange Act of 1934, and other written or oral statements
made by it or on its behalf, may include forward-looking statements, which
are based on a number of assumptions about future events and are subject to
various risks, uncertainties and other factors that may cause actual results
to differ materially from the views, beliefs and estimates expressed in such
statements. These risks, uncertainties and other factors include, but are not
limited to the following:
(1) Changes in the market price for the Company's finished products and feed
grains, both of which may fluctuate substantially and exhibit cyclical
characteristics typically associated with commodity markets.
(2) Changes in economic and business conditions, monetary and fiscal policies
or the amount of growth, stagnation or recession in the global or U.S.
economies, 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 cannot be controlled by the Company. When used in this quarterly
report, the words "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 products and feed grains, both of which
may fluctuate substantially and exhibit cyclical characteristics typically
associated with commodity markets. Other costs, excluding feed grains,
related to the profitability of the Company's poultry operations, including
hatching egg production, hatching, growing, and processing cost, are
responsive to efficient cost containment programs and management practices.
The Company 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 lines include over 200
institutional and consumer packaged food items that it sells nationally and
regionally, primarily to distributors, food service establishments and
retailers. The majority of the prepared food items are made to the
specifications of food service users.
RESULTS OF OPERATION
Net sales for the third quarter of fiscal 2000 were $158.4 million as
compared to $148.8 million for the third quarter of fiscal 2000. The
increase in the Company's net sales of $9.6 million or 6.4% resulted from
increases in the pounds of poultry products sold of 10.0% and prepared food
products sold of 13.4% during the three months ended July 31, 2000 as
compared to the three months ended July 31, 1999. The effect of these
increases in pounds of poultry and prepared food products sold on the
Company's net sales was partially offset by a net decrease in the average
sales price per pound of 3.3%. For the quarter ended July 31, 2000 as
compared to the same quarter during fiscal 1999 the net sales price of
poultry products decreased 4.9%. A simple average of the Georgia dock whole
bird prices for the third quarter of fiscal 2000 as compared to the third
quarter of fiscal 1999 reflected a decrease of 3.0%. Market prices for
breast and wings were substantially lower as the industry continued to be
adversely affected by an over supply of chicken and other meats. Net sales
of prepared food products increased $3.7 million or 20.6% during the three
months ended July 31, 2000 as compared to the three months ended July 31,
1999.
Net sales for the nine months ended July 31, 2000 were $435.2 million, an
increase of $25.6 million or 6.2% as compared to net sales for the nine
months ended July 31, 1999 of $409.7 million. A majority of the increase in
net sales was derived from an increase in pounds of poultry products sold of
10.8%. However, the increase in pounds of poultry products sold was
partially offset by a decrease in the average sales price per pound of
poultry products of 4.9%, as the Company continued to be adversely affected
by lower prices of poultry products. During the first nine months of fiscal
2000 as compared to the same period during fiscal 1999, a simple average of
the Georgia dock whole bird prices reflected a decrease of 5.8%. In
addition to the price decrease for whole birds, boneless breast meat prices
have fallen significantly during the third fiscal quarter, reaching an
historical low during a period that is typically characterized by peak demand
for poultry products. Net sales of prepared food products during the nine
months ended July 31, 2000 as compared to the nine months ended July 31,
1999, increased $6.3 million, or 12.1%, as a result of an increase in the
average sales price per pound of prepared food products of 5.2% and an
increase in the pounds of prepared food products sold of 6.6%
Cost of sales for the three months ended July 31, 2000 as compared to the
three months ended July 31, 1999 increased $23.1 million or 17.0%. The cost
of sales of poultry products increased $20.2 million or 16.7% due to the
increase in the pounds of poultry products sold of 10.0% and an increase in
the average cost per pound of poultry products sold of 6.2%. The increase in
the average cost per pound of poultry products sold resulted from an increase
in the cost of feed grains and increased packaging and labor costs associated
with the Company's larger presence in the chill pack markets. Corn and
soybean meal cash market prices for the three months ended July 31, 2000 as
compared to the three months ended July 31, 1999 reflected a decrease of
1.0% and an increase of 27.2%, respectively. Cost of sales of prepared food
products increased $2.9 million or 19.3%, resulting from the increase in the
pounds of prepared food products sold of 13.4% and a change in the mix of
products sold.
For the nine months ended July 31, 2000 as compared to the nine months ended
July 31, 1999, cost of sales increased $53.6 million or 14.3%. Cost of
sales of poultry products increased $49.4 million or 15.0%. This increase in
the cost of sales of poultry products was the result of an increase in the
pounds of poultry products sold of 10.8%, an increase in the processing cost
of poultry products related to the Company's increased presence in the chill
pack market and higher cost of soybean meal. Corn and soybean meal cash
market prices reflected a decrease of 1.9% and an increase of 18.7%,
respectively, when compared to the same nine months a year ago. Cost of sales
of prepared food products during the first half of fiscal 2000 as compared to
the first half of fiscal 1999 increased $4.2 million or 9.5% due primarily to
the increase in the pounds of prepared food products sold of 6.6%
Selling, general and administrative expenses for the third quarter and nine
months of fiscal 2000 increased $.4 million and $3.9 million, respectively, as
compared to the same periods during fiscal 1999. These increases reflect the
additional advertising and marketing costs related to the Company's change of
certain of its production from the fast food market to the chill pack market. In
addition, the Company recorded a bad debt reserve of $1.2 million during the
second quarter of fiscal 2000 resulting from the bankruptcy filing by Ameriserve
on February 1, 2000.
The Company's operating loss for the nine months ended July 31, 2000 was
$12.1 million as compared to operating income during the same quarter of
fiscal 1999 of $19.8 million. During fiscal 2000 as compared to fiscal 1999
the Company experienced lower prices for poultry products. Also, the bad debt
reserve relating to the bankruptcy filing by Ameriserve increased the
Company's operating loss by $1.2 million during fiscal 2000 as compared to
fiscal 1999. The Company expects the current weakness in the poultry market
to continue through the fourth quarter of fiscal 2000.
Interest expense during the third quarter of fiscal 2000 was $2.2 million as
compared to $1.5 million during the third quarter of fiscal 1999. For the
nine months ended July 31, 2000 as compared to the same period during fiscal
1999, interest expense increased $1.2 to $5.9 million.
The Company adopted the AICPA Statement of Position 98-5, "Reporting the
Costs of Start-up Activities" in the first quarter of fiscal 2000. The
effect of adopting SOP 98-5 was to record a charge for the cumulative effect
of an accounting change of $234,000 (net of income taxes of $140,000).
The effective tax rate for the three months and the nine months ended July
31, 2000 were 36.6% and 37.0%, respectively, as compared to effective tax
rates during the same periods of fiscal 1999 of 38.0% and 37.7%.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 2000, the Company's working capital was $70.3 million and its
current ratio was 2.8 to 1, as compared to working capital of $67.3 million
and a current ratio of 3.1 to 1 at October 31, 1999. During the nine months
ended July 31, 2000 the Company spent approximately $13.4 million on planned
capital projects and $2.5 million to repurchase 299,500 shares of its Common
Stock under its existing stock repurchase plan.
The Company's capital budget for fiscal 2000 was increased to $19.8 million
from $15.8 million. The increase of $4.0 million pertains to items not
approved at the beginning of fiscal 2000, pending justification, field trial
and alternate costing. Included in the fiscal 2000 budget are items that
include cost of renovations, changes and additions to existing processing
facilities to allow better product flows and product mix for more product
flexibility.
The Company believes that anticipated capital expenditures for fiscal 2000
will be funded from working capital and by cash flows from operations;
however, as of July 31, 2000 the Company had $16.0 million available under
its revolving credit agreement, if needed.
On April 15, 2000, thirteen individuals claiming to be former hourly
employees of the Company'' wholly owned subsidiary, Sanderson Farms, Inc.
(Processing Division), filed a lawsuit in behalf of themselves and an alleged
class consisting of those present and former hourly employees of the
subsidiary who may elect to join the lawsuit, for alleged violations by the
subsidiary of the Fair Labor Standards Act. The lawsuit is described in Item
1 of Part II of this report. The lawsuit is still in the preliminary stages,
and the Company is not yet able to assess the amount of an unfavorable
judgment, should that occur, or the impact an unfavorable judgment would have
on its financial statements. That assessment will depend (among other
factors) on the amount of unpaid time being claimed for each member of the
purported class, and on the number of such members who file consents to join
the lawsuit. The impact would not be material based on the number of
additional plaintiffs (109) who have purported to join the lawsuit to date.
The Company believes that this lawsuit is one of a series of substantially
identical lawsuits that have been filed against companies in its industry.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
There have been no material changes in the market risks reported in the
Company's fiscal 1999 Annual Report on 10K.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On April 5, 2000, thirteen individuals claiming to be former hourly employees
of the Company's wholly owned subsidiary, Sanderson Farms, Inc. (Processing
Division) (the "Plaintiffs"), filed a lawsuit against the subsidiary in the
United States District Court for the Southern District of Texas, Houston
Division, Civil Action No. H-00-0420. The Plaintiffs have sued on behalf of
themselves "and as representatives of similarly situated workers who have
filed and will file consents to join in this action." Plaintiffs have filed
a Notice of Filing of Consents To Sue which purports to contain the consents
of 109 individuals to be plaintiffs in this lawsuit.
Plaintiffs allege that the subsidiary (1) failed to pay Plaintiffs and its
other hourly employees "for time spent donning and doffing sanitary and
safety equipment, obtaining and sharpening knives and scissors, working in
the plant and elsewhere at the direction of the subsidiary before and after
the scheduled end of their shift, cleaning safety and sanitary equipment, and
walk time," and (2) altered employee time records by using the so-called
KRONOS time keeping system. For these reasons, plaintiffs claim that the
subsidiary's hourly employees were not paid for all compensable time worked,
in violation of the Fair Labor Standards Act. Plaintiffs further claim that
the subsidiary concealed the alteration of time records and seek on that
account an equitable tolling of the statute of limitations beyond the
three-year limitation period back to the date the so-called KRONOS
time-keeping system was allegedly implemented.
Plaintiffs seek an unspecified amount of unpaid hourly and overtime wages,
plus an equal amount as liquidated damages, for them and all other present
and former hourly employees who file consents to join the lawsuit. There are
presently approximately 7,267 hourly employees in the subsidiary's plants.
The Company's subsidiary is vigorously defending this lawsuit.
The Court has set January 15, 2001 as the date discovery must be completed,
and has set the trial for the May/June 2001 trial term.
