Item 1. Business
(a) GENERAL DEVELOPMENT OF THE REGISTRANT'S BUSINESS
Sanderson Farms, Inc. was incorporated in Mississippi in 1955. The Registrant is a fully-integrated poultry processing company engaged in the production, processing, marketing and distribution of fresh and frozen chicken products. In addition, through its wholly-owned subsidiary, Sanderson Farms, Inc. (Foods Division), the Registrant is engaged in the processing, marketing and distribution of processed and prepared food items. The Registrant sells ice pack, chill pack and frozen chicken, in whole, cut-up and boneless form, primarily under the Miss Goldy brand name to retailers, distributors, and fast food operators principally in the southeastern, southwestern and western United States. During its fiscal year ended October 31, 1994, the Registrant processed 162.1 million chickens, or approximately 522.8 million dressed pounds. According to 1994 industry statistics, the Registrant was the 15th largest processor of dressed chickens in the United States based on estimated average weekly processing. The Registrant's chicken operations presently encompass four hatcheries, three feed mills, five processing plants and one by-products plant. The Registrant has contracts with operators of approximately 403 grow-out farms that provide it with sufficient housing capacity for its current operations. The Registrant also has contracts with operators of 161 breeder farms. The Registrant sells over 100 processed and prepared food items nationally and regionally, primarily to distributors, national food service accounts, retailers and club stores. These food items include frozen entrees, such as chicken and dumplings, lasagna, seafood gumbo, and shrimp creole and specialty products, such as chicken patties and corn dogs. The Registrant also sells a retail entree line of six different two-pound frozen entrees including chicken primavera, lasagna with meat, seafood gumbo and mexican casserole with beef. This product line is designed as a convenient, quality product for the family. Since the Registrant completed the initial public offering of its common stock through the sale of 1,150,000 shares to an underwriting syndicate managed by Smith Barney, Harris Upham & Co. Incorporated and Morgan Keegan & Co. Inc. in May 1987, the Registrant has significantly expanded its operations to increase production capacity, product lines and marketing flexibility. Through 1993, this expansion included the expansion of the Registrant's Hammond, Louisiana processing facility, the construction of new waste water
facilities at the Hammond, Louisiana and Hazlehurst, Mississippi processing facilities, the addition of second shifts at the Hammond, Louisiana, Laurel, Mississippi and Hazlehurst, Mississippi processing facilities, expansion of freezer and production capacity at its prepared foods facility in Jackson, Mississippi, the expansion of freezer capacity at its Laurel, Mississippi, Hammond, Louisiana and Collins, Mississippi processing facilities, and the addition of deboning capabilities at four of the registrant's five poultry processing facilities. In addition, since 1987, the Registrant completed the expansion and renovation of the hatchery at its Hazlehurst, Mississippi production facilities, and completed the renovation and expansion of its Collins, Mississippi by-products facility, allowing for the elimination of a smaller by-products facility at the Laurel, Mississippi plant. During 1993, the Registrant began operations at its Pike County, Mississippi, production and processing facilities. These facilities include a hatchery, a feed mill, a processing plant, a waste water treatment facility and a water treatment facility. The Registrant continued its expansion during fiscal 1994. In January 1994, the Registrant began operations of a second processing line at its Pike County, Mississippi processing facility, which increased the Registrant's processing capacity by 325,000 birds per week to approximately 3,200,000 birds per week. In addition to expanding the Pike County processing facilities to include a second line, the Registrant expanded its Collins, Mississippi processing plant in early fiscal 1994 to allow for the deboning of product. The Registrant also began operations of a second shift on one of two processing lines at its Collins, Mississippi processing plant during June 1994. The new shift reached its processing capacity during the fourth quarter of fiscal 1994, and increased the number of birds the Company is processing to approximately 3,475,000 birds per week. Capital expenditures for fiscal 1994 were funded by working capital and borrowings under a revolving credit agreement. Effective July 28, 1994, the Registrant amended its revolving credit agreement to, among other things, increase the revolving credit available to the Registrant thereunder to $70.0 million from $60.0 million. The Registrant anticipates that capital expenditures for fiscal 1995 will be funded by internally generated working capital and borrowings under the revolving credit agreement. The Registrant currently has additional processing capacity available to it through the double shifting of its Pike County, Mississippi processing facility and the second line at its Collins, Mississippi processing facility. In addition, the Registrant continually evaluates internal and external expansion opportunities to continue its growth in poultry and/or related food products.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Not applicable.
(c) NARRATIVE DESCRIPTION OF BUSINESS
REGISTRANT'S BUSINESS
General
The Registrant is engaged in the production, processing, marketing and distribution of fresh and frozen chicken and the preparation, processing, marketing and distribution of processed and prepared food items. The Registrant sells chill pack, ice pack and frozen chicken, both whole and cut-up, primarily under the Miss Goldy brand name to retailers, distributors and fast food operators principally in the southeastern, southwestern and western United States. During its fiscal year ended October 31, 1994, the Registrant processed approximately 162.1 million chickens, or approximately 522.8 million dressed pounds. In addition, the purchased and further processed 52.3 million pounds of poultry products during fiscal 1994. According to 1994 industry statistics, the Registrant was the 15th largest
processor of dressed chicken in the United States based on estimated average weekly processing. The Registrant conducts its chicken operations through Sanderson Farms, Inc. (Production Division) and Sanderson Farms, Inc. (Processing Division), both of which are wholly-owned subsidiaries of the Sanderson Farms, Inc. Sanderson Farms, Inc. (Production Division), which has facilities in Laurel, Collins, Hazlehurst and Pike County, Mississippi, is engaged in the production of chickens to the broiler stage. Sanderson Farms, Inc. (Processing Division), which has facilities in Laurel, Collins, Hazlehurst and Pike County, Mississippi, and Hammond, Louisiana, is engaged in the processing, sale and distribution of chickens. The Registrant conducts its processed and prepared foods business through its wholly-owned subsidiary, Sanderson Farms, Inc. (Foods Division), which has a facility in Jackson, Mississippi. The Foods Division is engaged in the processing, marketing and distribution of over 100 processed and prepared food items, which it sells nationally and regionally, principally to distributors, national food service accounts, retailers and club stores. Products
The Registrant has the ability to produce a wide range of processed chicken products and processed and prepared food items thereby allowing it to take advantage of marketing opportunities as they arise. Processed chicken is first saleable as an ice packed whole chicken. The Registrant adds value to its ice packed whole chickens by removing the giblets, weighing, packaging and labelling the product to specific customer requirements and cutting the product based on customer specifications. The additional processing steps of giblet removal, close tolerance weighing and cutting increase the value of the product to the customer over whole chickens by reducing customer handling and cutting labor and capital costs, reducing the shrinkage associated with cutting, and ensuring consistently sized portions. With respect to chill pack products, additional value can be achieved by deep chilling and packaging whole chickens in bags or combinations of fresh chicken parts in various sized individual trays under the Registrant's brand name, which then may be weighed and prepriced, based on each customer's needs. The chill pack process increases the value of the product by extending shelf life, reducing customer weighing and packaging labor, and providing the customer with a wide variety of products with uniform, well designed packaging, all of which enhance the customer's ability to merchandise chicken products. To satisfy some customers' merchandising needs, the Registrant quick freezes the chicken product, which adds value by meeting the customers' handling, storage, distribution and marketing needs and by permitting shipment of product overseas where transportation time may be as long as 25 days. Value added products usually generate higher sale prices per pound, exhibit less finished price volatility and generally result in higher and more consistent profit margins over the long-term than non-value added product forms. Selling fresh chickens as a prepackaged brand name product has been a significant step in the development of the value added, higher margin consumer business. The Registrant evaluates daily the potential profitability of all product lines and attempts to maximize its profits on a short-term basis by making strategic changes in its product mix to meet customer demand. The following table sets forth, for the periods indicated, the contribution, as a percentage of net sales of chicken products, of value added and non-value added chicken products.
(1) Vacuum pack poultry products have been restated in 1993 and included in 1994 as fresh bulk pack, which includes ice pack and vacuum pack products. The vacuum pack products were classified as chill pack products in the 1993 Form 10-K.
(2) Consists of sales of poultry products that the Registrant purchases from other poultry processors for resale, as necessary, to meet customer demand.
Sales and Marketing
The Registrant's chicken products are sold primarily to retailers (including national and regional supermarket chains and local supermarkets), distributors and fast food operators located principally in the southeastern, southwestern and western United States. The Registrant also sells its chicken products to governmental agencies and to customers who resell the products outside of the continental United States. This wide range of customers, together with the Registrant's broad product mix, provides the Registrant with flexibility in responding to changing market conditions in its effort to maximize profits. This flexibility also assists the Registrant in its efforts to reduce its exposure to market volatility. Sales and distribution of the Registrant's chicken products are conducted primarily by sales personnel at the Registrants general corporate offices in Laurel, Mississippi and by customer service representatives at each of its five processing complexes and through independent food brokers. Each complex has individual on-site distribution centers and uses the Registrant's truck fleet, as well as contract carriers, for distribution of its products. Generally, the Registrant prices its chicken products based upon weekly market prices reported by the United States Department of Agriculture. Consistent with the industry, the Registrant's profitability is impacted by such market prices, which may fluctuate substantially and exhibit cyclical characteristics. The Registrant adds a markup to base prices, which depends upon value added, volume, product mix and other factors. While base prices may change weekly, the Registrant's markup is generally negotiated from time to time with the Registrant's customers. The Registrant's sales are generally made on an as-ordered basis, and the Registrant maintains no long-term sales contracts with its customers. The Registrant uses television, radio and newspaper advertising, coupon promotion, point of purchase material and other marketing techniques to develop consumer awareness of and brand recognition for its Miss Goldy products. The Registrant has achieved a high level of public awareness and acceptance of its products through television advertising featuring a celebrity as the Registrant's spokesperson. Brand awareness is an important element of the Registrant's marketing philosophy, and it intends to continue brand name merchandising of its products. The Registrant's processed and prepared food items are sold nationally and regionally, primarily to distributors, national food service accounts, retailers and club stores. Sales of such products are handled by independent food brokers located throughout the United States, primarily in the southeast and southwest United States, and by sales personnel of the Registrant. Processed and prepared food items are distributed from the Registrant's plant in Jackson, Mississippi, through arrangements with contract carriers.
Production and Facilities
General. The Registrant is a vertically-integrated producer of fresh and frozen chicken products, controlling the production of hatching eggs, hatching, feed manufacturing, growing, processing and packaging of its product lines.
Breeding and Hatching. The Registrant maintains its own breeder flocks for the production of hatching eggs. The Registrant's breeder flocks are acquired as one-day old chicks (known as pullets or cockerels) from primary breeding companies that specialize in the production of genetically designed breeder stock. As of October 31, 1994, the Registrant maintained contracts with 40 pullet farm operators for the grow-out of pullets (growing the pullet to the point at which it is capable of egg production, which takes approximately six months). Thereafter, the mature breeder flocks are transported by Registrant vehicles to breeder farms that are maintained, as of October 31, 1994, by 121 independent contractors under the Registrant's supervision. Eggs produced by independent contract breeders are transported to Registrant's hatcheries in Registrant vehicles. During the beginning of fiscal year 1994, the Registrant supplemented the production of hatching eggs by outside purchases of eggs for a period of twelve weeks, to support the second processing line at the Pike County processing facility. The Registrant owns and operates four hatcheries located in Mississippi where eggs are incubated and hatched in a process requiring 21 days. Once hatched, the day-old chicks are vaccinated against common poultry diseases and are transported by Registrant vehicles to independent contract grow-out farms. As of November 1994, the Registrant's hatcheries were capable of producing an aggregate of approximately 3.6 million chicks per week.
Grow-out. The Registrant places it chicks on 403 grow-out farms, as of October 31, 1994, located in Mississippi and Louisiana where broilers are grown to an age of approximately six to seven weeks. The farms provide the Registrant with sufficient housing capacity for its operations, and are typically family-owned farms which are operated under contract with the Registrant. The farm owners provide facilities, utilities and labor; the Registrant supplies the day-old chicks, feed and veterinary and technical services. The farm owner is compensated pursuant to an incentive formula designed to promote production cost efficiency.
Historically, the Registrant has been able to accommodate expansion in grow-out facilities through additional contract arrangements with independent growers.
Feed Mills. An important factor in the grow-out of chickens is the rate at which chickens convert feed into body weight. The Registrant purchases on the open market the primary feed ingredients, including corn and soybean meal, which historically have been the largest cost components of the Registrant's total feed costs. The quality and composition of the feed is critical to the conversion rate, and accordingly, the Registrant formulates and produces its own feed. As of October 31, 1994, the Registrant operated three feed mills, all of which are located in Mississippi. The Registrant's annual feed requirements for fiscal 1994 were approximately 752,000 tons, and it has the capacity to produce approximately 904,800 tons of finished feed annually under current configurations. Feed grains are commodities subject to volatile price changes caused by weather, size of harvest, transportation and storage costs and the agricultural policies of the United States and foreign governments. On October 31, 1994, the Registrant had approximately 401,000 bushels of corn storage capacity at its feed mills, which was sufficient to store all of its weekly requirements for corn. The Registrant purchases its corn and other feed supplies at current prices from suppliers and, to a limited extent, direct from farmers. Feed grains are available from an adequate number of sources. Although the Registrant has not experienced and does not anticipate problems in securing adequate supplies of feed grains, price fluctuations of feed grains can be expected to have a direct and material effect upon the Registrant's profitability. Although the Registrant sometimes purchases grains in forward markets, it cannot eliminate the potentially adverse affect of grain price increases.
Processing. Once the chicks reach processing weight, they are transported to the Registrant's processing plants. These plants use modern, highly automated equipment to process and package the chickens. The Registrant's Pike County, Mississippi processing plant, which currently operates two processing lines on a single shift basis, is currently processing approximately 650,000 chickens per week. The Registrant's Collins, Mississippi processing plant, which is currently operating one of its two lines on a double shift basis and one line on a single shift basis, is currently processing approximately 950,000 chickens per week. The Registrant's Laurel and Hazlehurst, Mississippi and Hammond, Louisiana processing plants currently operate on a double shift basis, and have the capacity to process an aggregate of approximately 1,875,000 chickens per week. The Registrant also has the capabilities to produce deboned product at all its processing facilities. At October 31, 1994, four of these deboning facilities were operating on a double shift basis and the fifth was operating on a single shift basis, resulting in a combined capacity to process approximately 2.9 million pounds of product per week at all deboning facilities.
Sanderson Farms, Inc. (Foods Division). The facilities of Sanderson Farms, Inc. (Foods Division) are located in Jackson, Mississippi in a plant with approximately 75,000 square feet of refrigerated manufacturing and storage space. The plant uses highly automated equipment to prepare, process and freeze food items. The Registrant could increase significantly its production of processed and prepared food items without incurring significant capital expenditures or delays.
Executive Offices; Other Facilities. The Registrant's corporate offices are located in Laurel, Mississippi. As of October 31, 1994, the Registrant operated one by-products plant, and five automotive maintenance shops which service approximately 308 Registrant over-the-road and farm vehicles. In addition, the Registrant has one child care facility located near its Collins, Mississippi, processing plant currently serving over 200 children.
Quality Control
The Registrant believes that quality control is important to its business and conducts quality control activities throughout all aspects of its operations. The Registrant believes these activities are beneficial to efficient production and in assuring its customers wholesome, high quality products. From the corporate offices, the Director of Technical Services supervises the operation of a modern, well-equipped laboratory which, among other things, monitors sanitation at the hatcheries, quality and purity of the Registrant's feed ingredients and feed, the health of the Registrant's breeder flocks and broilers, and conducts microbiological tests of live chickens, facilities and finished products. The Registrant conducts on-site quality control activities at each of the five processing plants and the processed and prepared food plant.
Regulation
The Registrant's facilities and operations are subject to regulation by various federal and state agencies, including, but not limited to, the federal Food and Drug Administration ("F.D.A."), the United States Department of Agriculture ("U.S.D.A."), the Environmental Protection Agency, the Occupational Safety and Health Administration and corresponding state agencies. The Registrant's chicken processing plants are subject to continuous on-site inspection by the U.S.D.A. The Sanderson Farms, Inc. (Foods Division) processing plant operates under the U.S.D.A.'s Total Quality Control Program which is a strict self-inspection plan written in cooperation with and monitored by the U.S.D.A. The F.D.A. inspects the production of the Registrant's feed mills. Compliance with existing regulations has not had a material adverse effect upon the Registrant's earnings or competitive position in the past and is not anticipated to have a materially adverse effect in the future. Management believes that the Registrant is in substantial compliance with existing laws and regulations relating to the operation of its facilities and does not know of any major capital expenditures necessary to comply with such statutes and regulations. The Registrant takes extensive precautions to ensure that its flocks are healthy and that its processing plants and other facilities operate in a healthy and environmentally sound manner. Events beyond the control of the Registrant, however, such as an outbreak of disease in its flocks or the adoption by governmental agencies of more stringent regulations, could materially and adversely affect its operations.
Competition
The Registrant is subject to significant competition from regional and national firms in all markets in which it competes. Some of the Registrant's competitors have greater financial and marketing resources than the Registrant. The primary methods of competition are price, product quality, number of products offered, brand awareness and customer service. The Registrant has emphasized product quality and brand awareness through its advertising strategy. See "Business - Sales and Marketing". Although poultry is relatively inexpensive in comparison with other meats, the Registrant competes indirectly with the producers of other meats and fish, since changes in the relative prices of these foods may alter consumer buying patterns.
Sources of Supply
During fiscal 1994, the Registrant purchased its pullets and its cockerels from three major breeders. The Registrant has found the genetic cross of the breeds supplied by these companies to produce chickens most suitable to the Registrant's purposes. The Registrant has no written contracts with these breeders for the supply of breeder stock. Other sources of breeder stock are available, and the Registrant continually evaluates these sources of supply. Should breeder stock from its present suppliers not be available for any reason, the Registrant believes that it could obtain adequate breeder stock from other suppliers. During fiscal 1994, the Registrant purchased approximately 1.3% of its hatching egg requirements from an outside source to supplement the Registrant's hatching egg production. Purchases from this supplier were discontinued during the first quarter of fiscal 1994 as sufficient breeder operators were under contract to support the Registrant's operations. Other major raw materials used by the Registrant include feed grains, cooking ingredients and packaging materials. The Registrant purchases these materials from a number of different vendors and believes that its sources of supply are adequate for its present needs. The Registrant does not anticipate any difficulty in obtaining these materials in the future.
Seasonality
The demand for the Registrant's chicken products generally is greatest during the spring and summer months and lowest during the winter months. Trademarks
The Registrant has registered with the United States Patent and Trademark Office the trademark Miss Goldy which it uses in connection with the distribution of its premium grade chill pack products. The Registrant considers the protection of this trademark to be important to its marketing efforts due to consumer awareness of and loyalty to the Miss Goldy label. The Registrant also has registered with the United States Patent and Trademark Office six other trademarks which are used in connection with the distribution of chicken and other products and for other competitive purposes. The Registrant has registered with the United States Patent and Trademark Office the trademark Sanderson Farms which it uses in connection with the distribution of its prepared foods and two pound frozen entree products. The Registrant, over the years, has developed important non-public proprietary information regarding product related matters. While the Registrant has internal safeguards and procedures to protect the confidentiality of such information, it does not generally seek patent protection for its technology.
Employees and Labor Relations
As of October 31, 1994, the Registrant had 4,854 employees, including 668 salaried and 4,186 hourly employees. A collective bargaining agreement, which expired on November 30, 1994, with the United Food and Commercial Workers International Union covering 483 hourly employees who work at the Registrant's processing plant in Hammond, Louisiana, was renegotiated and signed by the union and the Registrant effective November 6, 1994. This agreement will expire on November 30, 1998. The collective bargaining agreement has a grievance procedure and no strike-no lockout clauses that should assist in maintaining stable labor relations at the Hammond plant. On June 30, 1994, an election was held by the National Labor Relations Board at the Registrant's Collins, Mississippi processing plant as a result of a petition filed by the Laborer's International Union of North America Local 693 seeking recognition as the exclusive collective bargaining representative of certain employees at that plant. The results of the election were inconclusive, with 430 votes cast in favor of union representation, 413 votes cast against union representation, and 29 votes not opened or counted because of challenges to their eligibility. On July 7, 1994, the Registrant filed its objections with the National Labor Relations Board asking that Board to count the ballots challenged by the union and to set aside the election as a result of improper election activity on the part of the union. A hearing on these objections and the challenged ballots was ordered, and was concluded on August 16, 1994. On October 9, 1994, the hearing officer issued his report and recommendation to the National Labor Relations Board that the Registrant's objectives and challenges be dismissed and that the appropriate certification of the union be issued. On November 15, 1994, the Registrant filed its exceptions to the hearing officer's report and recommendation, and the matter is now pending before the National Labor Relations Board. On December 14, 1994, the National Labor Relations Board scheduled an election at the Registrant's Hazlehurst, Mississippi processing plant as a result of a petition filed by the Laborer's International Union of North America Local 693 seeking recognition as the exclusive collective bargaining representative of certain employees at that plant. The election is scheduled for January 27, 1995.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Registrant engages in no material foreign operations, and no material portion of its revenues was derived from customers in foreign countries.
Item 2.

Item 2. Properties.
The Registrant owns substantially all of its major operating facilities with the following exceptions: one processing plant and feed mill complex is leased on an annual renewal basis through 2063 with an option to purchase at a nominal amount, at the end of the lease term. One processing plant complex is leased under four leases, three of which are renewable annually through 2061, 2063, 2075 and 2073, respectively. Certain infrastructure improvements associated with a processing plant are leased under a lease which expires in 2012 and is thereafter renewable annually through 2091. All of the foregoing leases are capital leases. There are no material encumbrances on the major operating facilities owned by the Registrant, except that the plant of Sanderson Farms, Inc. (Foods Division) is encumbered by a mortgage which collateralizes a note with an outstanding principal balance of $1,609,208 on December 31, 1994, which bears interest at the rate of 5% per annum and is payable in equal annual installments through 2009. In addition, under the terms of the revolving credit agreement obtained July 29, 1992, and under the $20 million long-term fixed rate loan obtained in February, 1993, the Registrant may not pledge any additional assets as collateral other than fixed assets up to 15% of its tangible assets. Management believes that the Company's facilities are suitable for its current purposes, and believes that current renovations and expansions will enhance present operations and allow for future internal growth.
Item 3.

Item 3. Legal Proceedings.
There are no material pending legal proceedings, other than routine litigation incidental to the Registrant's business, to which the Registrant is a party or of which its property is the subject, and no such proceedings are known by the Registrant to be contemplated by governmental authorities.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Registrant's security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the Fiscal Year.
(1) Joe Frank Sanderson, a founder of the Registrant, has served as Chairman of the Board for more than five years. Prior to November 1, 1989, Mr. Sanderson also served as Chief Executive Officer and Treasurer of the Registrant.
(2) Joe F. Sanderson, Jr. has served as President and Chief Executive Officer of the Registrant since November 1, 1989. From January 1984, to November 1989, Mr. Sanderson served as Vice-President, Processing and Marketing of the Registrant.
(3) D. Michael Cockrell became Treasurer and Chief Financial Officer of the Registrant effective November 1, 1993. Prior to that time, for more than five years, Mr. Cockrell was a member and shareholder of the Jackson, Mississippi law firm of Wise Carter Child & Caraway, Professional Association.
(4) James A. Grimes became Secretary of the Registrant effective November 1, 1993. Mr. Grimes also serves as Chief Accounting Officer, which position he has held since 1985.
Executive officers of the Company serve at the pleasure of the Board of Directors. There are no understandings or agreements relating to any person's service or prospective service as an executive officer of the Registrant. Joe F. Sanderson, Jr. is the son of Joe Frank Sanderson. Joe Frank Sanderson and Joe F. Sanderson, Jr. are also Directors of the Registrant.
PART II
Item 5.

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock is traded on the NASDAQ National Market System under the symbol SAFM. The number of stockholders as of December 31, 1994, was 606.
The following table shows quarterly cash dividends and quarterly high and low prices for the common stock for the past two fiscal years. National Market quotations are based on actual sales prices.
On December 30, 1994, the closing sales price for the common stock was $22.25 per share.
Item 6.

Item 6. Selected Financial Data.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
GENERAL
The Company's poultry operations are integrated through its control of all functions relative to the production of its chicken products, including hatching egg production, hatching, feed manufacturing, raising chickens to marketable age ("grow out"), processing, and marketing. Consistent with the industry, its profitability is substantially impacted by the market price for finished product and feed grains, both of which may fluctuate substantially and exhibit cyclical characteristics typically associated with commodity markets. Other costs, excluding feed, related to the profitability of its poultry operations, including hatching egg production, hatching, growing, and processing cost, are responsive to efficient cost containment programs and management practices. Over the past three fiscal years, these other production costs have averaged approximately 60% of the Company's total production costs.
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 sales, 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. 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 labelling 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 100 institutional and consumer packaged food items which 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.
On February 24, 1994, the Company announced plans to add a second shift to one of two processing lines at its Collins, Mississippi processing plant. The new shift began operations during June 1994 and reached its processing capacity during the fourth quarter of fiscal 1994. This additional shift increased the number of birds the Company is processing to approximately 3,475,000 birds per week.
Poultry prices per pound, as measured by the Georgia dock price, fluctuated during the three years ended October 31, 1994 as follows:
Market prices, as measured by the Georgia dock price, have decreased from October 31, 1994 through the Thanksgiving holiday to $.5125 per pound. Market prices have remained stable at $.5125 per pound from Thanksgiving through the Christmas season.
During fiscal 1993, the poultry industry experienced a favorable finished product environment and an overall decline in feed grain prices. These factors, together with the Company's expansion, favorably impacted income from operations. During fiscal 1994, as in fiscal 1993, the poultry industry experienced higher prices for poultry products as compared to the previous fiscal year. However, the positive effect of improved prices of poultry products was partially offset by higher costs of feed grains. Although feed costs were higher overall for fiscal 1994 than for fiscal 1993, they declined significantly during the last months of fiscal 1994. The Company is unable to predict how long current conditions will continue or to what extent cyclical pressures will affect operations.
RESULTS OF OPERATIONS:
Fiscal 1994 Compared to Fiscal 1993
Net sales for the year ended October 31, 1994, increased to $371.5 million, an increase of $102.4 million, or 38.1%. The increase in net sales resulted from a 35.2% increase in the total pounds of products sold and a 2.1% increase in the average sale price of products. Net sales of poultry products sold increased $100.0 million, or 45.8%, when compared to fiscal 1993. The increase in the net sales of poultry products was due to an increase in the pounds of poultry products sold of 38.3% and an increase in the average net sales price of poultry products of 5.5%. Net sales of prepared food products increased $2.4 million, or 4.7%. The pounds of prepared food products sold increased 3.2% as the average sale price of prepared food products increased 1.5% during fiscal 1994 as compared to fiscal 1993.
Cost of sales for fiscal 1994 increased approximately $94.6 million, or 40.3%, as compared to fiscal 1993. Cost of sales of poultry products sold increased $92.6 million, or 46.1%, during fiscal 1994 as compared to fiscal 1993. The increase in cost of sales for fiscal 1994 as compared to fiscal 1993, resulted primarily from the increased pounds of poultry products sold and an increase in the overall costs of feed grains. A simple average of the corn and soybean meal cash market prices reflected an increase of 10.4% and a decrease of 3.5%, respectively, during fiscal 1994 as compared to the previous fiscal year. Cost of sales of prepared food products increased $2.0 million, or 6.1%, during the year ended October 31, 1994 as compared to the year ended October 31, 1993.
Selling, general and administrative expenses in fiscal 1994 increased $.4 million, or 3.1%, as compared to fiscal 1993. Measured as a percentage of net sales, selling, general and administrative expenses for fiscal 1994 were 3.8% as compared to 5.1% during fiscal 1993.
Interest expense increased approximately $1.6 million during fiscal 1994 as compared to fiscal 1993. The increase in interest expense is due primarily to higher interest rates and reflects interest incurred on borrowed funds for the financing of the Pike County complex and other major construction projects for the entire year of fiscal 1994.
The Company's effective tax rate increased in fiscal 1994 to approximately 37.7% as compared to approximately 37.1% in fiscal 1993. The increase is primarily due to higher earnings in fiscal 1994 as compared to fiscal 1993, which resulted in tax calculations using higher tax rates.
Fiscal 1993 Compared to Fiscal 1992
For the year ended October 31, 1993, net sales increased $59.0 million or 28.1% as compared to the year ended October 31, 1992. The increase in net sales resulted from a 24.4% increase in the total pounds of products sold and a 3.0% increase in the average sale price of products sold during fiscal 1993 as compared to fiscal 1992. Net sales of poultry products sold increased $53.6 million, or 32.5%, when compared to fiscal 1992. The increase in net sales of poultry during fiscal 1993 as compared to fiscal 1992 is a result of an increase in the pounds of poultry products sold and an increase in the average sale price of poultry products of 26.2% and 5.0%, respectively. Net sales of prepared food products increased $5.4 million, or 11.9%. The pounds of prepared food products sold increased 7.9% as the average sale price of prepared food products increased 3.7%.
Cost of sales for fiscal 1993 increased approximately $45.8 million, or 24.2%, over the prior fiscal year. Of the increase, approximately $42.6 million was associated with poultry products and was due primarily to the increase in pounds of poultry products sold. A simple average of the corn and soy meal cash market prices reflected a decrease of 6.3% and an increase of 4.1%, respectively, when compared to fiscal 1992. Cost of sales of prepared food products sold increased $3.2 million, or 10.4%, during fiscal 1993 as compared to fiscal 1992, primarily as a result of an increase in the pounds of prepared food products sold.
Selling, general and administrative expenses in fiscal 1993 increased $.5 million, or 3.6%, as compared to fiscal 1992. Selling, general and administrative expenses for fiscal 1993 were 5.1% of net sales as compared to 6.2% of net sales in fiscal 1992.
Interest expense increased approximately $1.9 million during fiscal 1993 as compared to fiscal 1992. Interest costs of $.4 million and $.3 million were capitalized as a result of additional borrowings incurred in connection with the construction of the Pike County, Mississippi complex and other major construction projects in fiscal 1993 and 1992, respectively. Interest income decreased approximately $.2 million during fiscal 1993 as compared to fiscal 1992 as a result of reduced amounts available for investments and lower interest rates.
The Company's effective tax rate increased in fiscal 1993 to approximately 37.1% as compared to approximately 36.0% in fiscal 1992. The increase is primarily due to reduced tax-free interest income as a percentage of net income before taxes. The effect of the retroactive tax rate increase incorporated into the Revenue Reconciliation Act of 1993 was insignificant.
LIQUIDITY AND CAPITAL RESOURCES
On October 31, 1994, the Company's working capital totaled $45.8 million and its current ratio was 5.6 to 1, as compared to working capital of $42.5 million and a current ratio of 6.6 to 1 at October 31, 1993. During fiscal 1994, the Company expended $22.4 million on planned capital projects and $4.0 million to reduce the outstanding debt under its revolving credit agreement. During the third quarter of fiscal 1994, the credit agreement was amended to, among other things, increase the revolving credit available to the Company thereunder to $70.0 million from $60.0 million. The same group of banks that were parties to the original revolving credit agreement were parties to the amendment.
The Company's capital budget for fiscal 1995 is approximately $23.2 million. The original capital budget for fiscal 1994 was approximately $21.6 million, which was increased to approximately $26.7 million due to the addition of items not approved at the beginning of fiscal 1994 pending justification, field trial and alternate costing. Included in the fiscal 1995 budget is approximately $3.9 million relating to fiscal 1994 budget items that were not completed or started in fiscal 1994. Also included in the fiscal 1995 budget are renovations to offices at three processing facilities and other major capital projects for changes and additions to existing processing facilities to allow better product flow and product mix for more market flexibility.
The Company anticipates that the capital expenditures for fiscal 1995 will be funded by working capital and additional borrowings under its $70.0 million revolving credit agreement.
Sanderson Farms, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of Sanderson Farms, Inc. (the "Company") and its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.
Temporary Cash Investments: Temporary cash investments are stated at cost which approximates market. Included are investment agreements for securities purchased under agreements to resell with a maturity of one day.
Accounts Receivable: The Company sells fresh and frozen chicken and other prepared food items to retailers, distributors and fast food operators in the southern, southwestern and western United States. Management periodically performs credit evaluations of its customers' financial condition and generally does not require collateral. Credit losses have consistently been within management's expectations.
Inventories: Processed food and poultry inventories and inventories of feed, egg, medication and packaging supplies are stated at the lower of cost (first- in, first-out method) or market.
Live poultry inventories of broilers are stated at the lower of cost or market and breeders at cost less accumulated amortization. The costs associated with breeders are accumulated up to the production stage and amortized over the productive lives using the straight-line method.
Property, Plant and Equipment: Property, plant and equipment is stated at cost. Depreciation of property, plant and equipment is provided by the straight-line and units of production methods over the estimated useful lives.
Income Taxes: Deferred income taxes relate principally to cash basis temporary differences and depreciation expense accounted for differently for financial and income tax purposes. Effective November 1, 1988, the Company could no longer use cash basis accounting for its farming subsidiary because of tax law changes. The taxes on the cash basis temporary differences as of that date will not be payable under current tax laws provided there are no changes in ownership control and future annual revenues of the farming subsidiary exceed 1988 revenues. Management does not anticipate the payment of such taxes related to these cash bases timing differences during fiscal 1995. (See Note 4).
Effective October 31, 1993, the Company adopted Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes." The effect of adopting the statement was insignificant on the Company's financial position and operations.
Earnings Per Share: Earnings per share are based upon the weighted average number of shares outstanding during each year. The weighted average shares outstanding were 9,075,427 in 1994, 1993 and 1992.
2. Inventories Inventories consisted of the following:
3. Long-term Credit Facilities and Debt Long-term debt consisted of the following:
The Company has a $70.0 million ($40.0 million available at October 31, 1994) revolving credit agreement with four banks. The revolver extends to 1997, when the outstanding borrowings may be converted to a term loan payable in equal semiannual installments over four years. Borrowings are at prime or below and may be prepaid without penalty. A commitment fee of .375% is payable quarterly on the unused portion of the revolver. Covenants related to the revolving credit and the term loan agreements include requirements for maintenance of minimum consolidated net working capital, tangible net worth, debt to total capitalization and current ratio. The agreements also establish limits on dividends, assets that can be pledged and capital expenditures.
Property, plant and equipment with a carrying value of approximately $7,941,000 is pledged as collateral to a note payable and the capital lease obligation.
Interest costs of $0, $416,000 and $250,000 were capitalized in 1994, 1993 and 1992, respectively.
The aggregate annual maturities of long-term debt at October 31, 1994 are as follows (in thousands):
Significant components of the Company's deferred tax assets and liabilities at were as follows (in thousands):
Deferred tax assets (included in prepaid expenses):
The differences between the consolidated effective income tax rate and the federal statutory rate were as follows:
5. Employee Benefit Plans
The Company has a defined contribution profit sharing plan that covers all employees and an employee stock ownership plan that is restricted to salaried employees. As of October 31, 1994, the Company is waiting to receive approval from the Internal Revenue Service to merge the employee profit sharing plan into the employee stock ownership plan. Annual contributions are made at the discretion of the Board of Directors. Total contributions to the profit sharing plan were $1,200,000 in 1994, $750,000 in 1993 and $350,000 in 1992.
Under the Company's Stock Option Plan, 500,000 shares of Common Stock have been reserved for grant to key management personnel. Options to purchase an aggregate of 30,000 shares at $16 per share and 57,000 shares at $16.50 are outstanding at October 31, 1994. Options to purchase 6,000 shares were exercisable at October 31, 1994.
6. Shareholder Rights Agreement
On April 21, 1989, the shareholders of the Company approved a shareholders rights agreement (the "Agreement") under which one share purchase right ("right") was declared as a dividend for each share of the Company's Common Stock outstanding on May 31, 1989. The rights do not become exercisable and certificates for the rights will not be issued until ten business days after a person or group acquires or announces a tender offer for the beneficial ownership of 20% or more of the Company's Common Stock. Special rules set forth in the Agreement apply to determine beneficial ownership for members of the Sanderson family. Under these rules, such a member will not be considered to beneficially own certain shares of Common Stock, the economic benefit of which is received by any member of the Sanderson family, and certain shares of Common Stock acquired pursuant to profit sharing plans of the Company.
The exercise price of a right has been established at $53. Once exercisable, each right would entitle the holder to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $100 per share. The rights may be redeemed by the Board of Directors at $.01 per right prior to an acquisition, through open market purchases, a tender offer or otherwise, of the beneficial ownership of 20% or more of the Company's Common Stock, or by two-thirds of the Directors who are not the acquirer, or an affiliate of the acquirer, prior to the acquisition of 50% or more of the Company's Common Stock by such acquirer. The rights expire on April 21, 1999.
7. Other Matters
One customer accounted for 10.4% and 11.6% of consolidated sales for the years ended October 31, 1993 and 1992. No customer accounted for more than 10% of consolidated sales for the year ended October 31, 1994. Export sales were less than 10% of consolidated sales in each year presented.
The effects of adopting in 1994 FASB Statement No. 106 "Employers' Accounting for Postretirment Benefits other than Pension" was insignificant to the Company's financial position and operation for the year ended October 31, 1994. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
As required by General Instruction G(3) to Form 10-K, reference is made to the information concerning the Directors of the Registrant and the nominees for election as Directors appearing in the Registrant's definitive proxy statement filed or to be filed with the Commission pursuant to Rule 14a-6(c). Such information is incorporated herein by reference to the definitive proxy statement. Information concerning the executive officers of the Registrant is set forth in Item 4A of Part I of this Annual Report.
Item 11. Executive Compensation.
As required by General Instruction G(3) to Form 10-K, reference is made to the information concerning remuneration of Directors and executive officers of the Registrant appearing in the Registrant's definitive proxy statement filed or to be filed with the Commission pursuant to Rule 14a-6(c). Such information is incorporated herein by reference to the definitive proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
As required by General Instruction G(3) to Form 10-K, reference is made to the information concerning beneficial ownership of the Registrant's Common Stock, which is the only class of the Registrant's voting securities, appearing in the Registrant's definitive proxy statement filed or to be filed with the Commission pursuant to Rule 14a-6(c). Such information is incorporated herein by reference to the definitive proxy statement.
Item 13. Certain Relationships and Related Transactions.
Not applicable.
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)1. FINANCIAL STATEMENTS:
The following consolidated financial statements of the Registrant are included in Item 8: