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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
___________________________
FORM 10-Q
___________________________
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2020
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: 1-14977
___________________________
Sanderson Farms, Inc.
(Exact name of registrant as specified in its charter)
___________________________
Mississippi 64-0615843
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
         127 Flynt Road, Laurel, Mississippi      39443
         (Address of principal executive offices)      (Zip Code)
(601) 649-4030
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of each exchange on which registered
Common Stock, $1 par value per share SAFM NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer
  
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      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 Par Value Per Share: 22,239,973 shares outstanding as of August 25, 2020.


TABLE OF CONTENTS
SANDERSON FARMS, INC. AND SUBSIDIARIES
3
Item 1.
3
3
4
5
6
7
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.
2

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares)
July 31,
2020
October 31,
2019
  (Unaudited) (Note 1)
Assets
Current assets:
Cash and cash equivalents $ 66,119  $ 95,417 
Accounts receivable, net 150,773  131,778 
Receivable from insurance companies   445 
Inventories 285,941  289,928 
Refundable income taxes 41,247  6,612 
Prepaid expenses and other current assets 66,249  56,931 
Total current assets 610,329  581,111 
Property, plant and equipment, net 1,229,771  1,185,860 
Right of use assets 42,473   
Other assets 5,982  7,163 
Total assets $ 1,888,555  $ 1,774,134 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 102,753  $ 132,741 
Dividends payable 7,117   
Accrued expenses 94,836  82,940 
Lease liabilities 14,401   
Total current liabilities 219,107  215,681 
Long-term debt 95,000  55,000 
Claims payable and other liabilities 11,801  11,646 
Deferred income taxes 135,287  74,132 
Long-term lease liabilities 28,072   
Commitments and contingencies
Stockholders’ equity:
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—22,239,973 and 22,203,920 at July 31, 2020 and October 31, 2019, respectively
22,240  22,204 
Paid-in capital 88,582  86,010 
Retained earnings 1,288,466  1,309,461 
Total stockholders’ equity 1,399,288  1,417,675 
Total liabilities and stockholders’ equity $ 1,888,555  $ 1,774,134 
See notes to condensed consolidated financial statements.
3

SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share amounts)
Three Months Ended 
 July 31,
Nine Months Ended 
 July 31,
  2020 2019 2020 2019
Net sales $ 956,455  $ 945,152  $ 2,624,244  $ 2,533,769 
Cost and expenses:
Cost of sales 865,997  824,144  2,521,804  2,273,377 
Selling, general and administrative 50,590  52,226  156,289  159,991 
916,587  876,370  2,678,093  2,433,368 
Operating income (loss) 39,868  68,782  (53,849) 100,401 
Other income (expense):
Interest income 466    466   
Interest expense (1,521) (1,492) (4,492) (3,174)
Other 2  4  7  6 
(1,053) (1,488) (4,019) (3,168)
Income (loss) before income taxes 38,815  67,294  (57,868) 97,233 
Income tax expense (benefit) 6,005  13,932  (58,220) 21,068 
Net income $ 32,810  $ 53,362  $ 352  $ 76,165 
Earnings per share:
Basic $ 1.48  $ 2.41  $ 0.02  $ 3.44 
Diluted $ 1.48  $ 2.41  $ 0.02  $ 3.44 
Dividends per share $ 0.32  $ 0.32  $ 0.96  $ 0.96 
See notes to condensed consolidated financial statements.

4

SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(In thousands, except shares and per share amounts)
Fiscal Year 2019 Common Stock Paid-In
Capital
Retained
Earnings
Total
Stockholders’
Equity
Shares Amount
Balance at October 31, 2018 22,099,780  $ 22,100  $ 81,269  $ 1,284,524  $ 1,387,893 
Net loss - first quarter 2019       (17,833) (17,833)
Cash dividends ($0.32 per share)
      (7,089) (7,089)
Stock compensation plan transactions 53,688  53  (2,126)   (2,073)
Amortization of unearned compensation     2,313    2,313 
Balance at January 31, 2019 22,153,468  $ 22,153  $ 81,456  $ 1,259,602  $ 1,363,211 
Net income - second quarter 2019       40,636  40,636 
Cash dividends ($0.32 per share)
      (7,089) (7,089)
Stock compensation plan transactions 777  1  1,628    1,629 
Amortization of unearned compensation     2,325    2,325 
Balance at April 30, 2019 22,154,245  $ 22,154  $ 85,409  $ 1,293,149  $ 1,400,712 
Net income - third quarter 2019       53,362  53,362 
Cash dividends ($0.32 per share)
      (7,090) (7,090)
Stock compensation plan transactions (1,504) (1) 115    114 
Amortization of unearned compensation     3,367    3,367 
Balance at July 31, 2019 22,152,741  $ 22,153  $ 88,891  $ 1,339,421  $ 1,450,465 

Fiscal Year 2020 Common Stock Paid-In
Capital
Retained
Earnings
Total
Stockholders’
Equity
Shares Amount
Balance at October 31, 2019 22,203,920  $ 22,204  $ 86,010  $ 1,309,461  $ 1,417,675 
Net loss - first quarter 2020       (38,576) (38,576)
Cash dividends ($0.32 per share)
      (7,113) (7,113)
Stock compensation plan transactions 25,292  25  (4,721)   (4,696)
Amortization of unearned compensation     2,082    2,082 
Balance at January 31, 2020 22,229,212  $ 22,229  $ 83,371  $ 1,263,772  $ 1,369,372 
Net income - second quarter 2020       6,118  6,118 
Cash dividends ($0.32 per share)
      (7,117) (7,117)
Stock compensation plan transactions 10,362  10  1,099    1,109 
Amortization of unearned compensation     1,960    1,960 
Balance at April 30, 2020 22,239,574  $ 22,239  $ 86,430  $ 1,262,773  $ 1,371,442 
Net income - third quarter 2020       32,810  32,810 
Cash dividends ($0.32 per share)
      (7,117) (7,117)
Stock compensation plan transactions 399  1  152    153 
Amortization of unearned compensation     2,000    2,000 
Balance at July 31, 2020 22,239,973  $ 22,240  $ 88,582  $ 1,288,466  $ 1,399,288 
See notes to condensed consolidated financial statements.
5

SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
  Nine Months Ended 
 July 31,
  2020 2019
Operating activities
Net income $ 352  $ 76,165 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 115,274  97,829 
Amortization of share-based compensation 7,500  9,661 
Live inventory adjustment (net of prior period reversal) (2,800) (9,600)
Provision for losses (recoveries) on accounts receivable   (2,000)
Deferred income taxes 61,155  21,000 
Loss on asset disposals 328   
Change in assets and liabilities:
Accounts receivable - trade (18,995) (8,294)
Accounts receivable - insurance 445  1,494 
Income taxes (34,635) 25,719 
Inventories 6,787  (56,590)
Prepaid expenses and other assets (8,955) (17,729)
Right of use assets 12,173   
Lease liabilities (12,173)  
Accounts payable (23,021) 5,330 
Accrued expenses and other liabilities 12,285  9,099 
Total adjustments 115,368  75,919 
Net cash provided by operating activities 115,720  152,084 
Investing activities
Capital expenditures (165,998) (210,878)
Net proceeds from sale of property and equipment 336  1,535 
Net cash used in investing activities (165,662) (209,343)
Financing activities
Payment of debt issuance costs   (2,225)
Borrowings from revolving line of credit 145,000  100,000 
Payments on revolving line of credit (105,000) (70,000)
Proceeds from issuance of restricted stock under stock compensation plans 879  708 
Payments from issuance of common stock under stock compensation plans (6,005) (3,976)
Dividends paid (14,230) (14,179)
Net cash provided by financing activities 20,644  10,328 
Net change in cash and cash equivalents (29,298) (46,931)
Cash and cash equivalents at beginning of period 95,417  121,193 
Cash and cash equivalents at end of period $ 66,119  $ 74,262 
Supplemental disclosure of non-cash investing and financing activities:
Capital expenditures included in accounts payable $ 3,242  $ 5,659 
Dividends payable $ 7,117  $ 7,089 
See notes to condensed consolidated financial statements.
6

SANDERSON FARMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
July 31, 2020
NOTE 1—ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair presentation have been included. Operating results for the three and nine months ended July 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending October 31, 2020.
The condensed consolidated balance sheet at October 31, 2019 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. 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 its fiscal year ended October 31, 2019.
New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases. The guidance is intended to increase transparency and comparability among companies by requiring an entity that is a lessee to recognize on the balance sheet the right-of-use assets and lease liabilities arising from all leases with terms, as defined by the guidance, of greater than twelve months. The guidance also requires disclosure of key information about leasing arrangements. The Company adopted this guidance during the first quarter of fiscal 2020, and we used the transition method that requires a cumulative-effect adjustment to the beginning balance of retained earnings during the period of adoption, rather than restating prior-period financial statements; however no such cumulative-effect adjustment was required under our circumstances. This guidance also provides certain practical expedients, including a practical expedient package during transition. We elected to use this package, which allowed the Company to carry forward its determination of whether a lease exists, the classification of a lease, and whether initial direct lease costs exist for purposes of transition to the new standard. We did not utilize the hindsight practical expedient. As of July 31, 2020, we recognized right-of-use assets and lease liabilities of approximately $42.5 million, primarily related to transportation equipment. Adoption did not have a material effect on our consolidated statements of operations and cash flows. For further information regarding the Company's leases, refer to "Part I, Item 1, Notes to Condensed Consolidated Financial Statements, Note 11 - Leases."
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, our fiscal 2021. Early adoption is permitted. We do not expect adoption to have a material effect on our consolidated financial statements.
NOTE 2—REVENUE
Revenue Recognition
The Company recognizes revenue in connection with a contract in which the Company has agreed to sell, and a customer has agreed to purchase, specific quantities of product at agreed-upon prices and when the Company's performance obligation related to that contract has been satisfied. In the majority of its contracts with customers, the Company's performance obligation is satisfied when delivery of the product has occurred, either at the customer's facility or the Company's facility, depending on the terms of each contract. In a smaller number of contracts, ownership of the product passes from the Company to the customer at some point during transit, at which time the performance obligation is satisfied and revenue is recognized. Revenue and related receivables are recognized based on the transaction price within the contract and are reduced by estimated or known amounts for items such as rebates, discounts, cooperative advertising allowances and other various items.
The cost incurred for shipping and handling activities to deliver the product to the customer is recognized in cost of sales during the period in which the corresponding revenue is recognized. Where shipping and handling activities occur after the
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customer has obtained control of the product, the Company has elected to account for those expenses as fulfillment costs in cost of sales, rather than an additional promised service. Revenue is reported gross of any freight charge that is separately invoiced to a customer, and all freight costs are accounted for as cost of sales.
Due to the nature of our contracts, commissions associated with such contracts provide only a short-term benefit (i.e. less than one year); therefore, we recognize costs of commissions paid to third-party brokers as selling, general and administrative expenses.
Disaggregation of Revenue
The following tables disaggregate our net sales by product category (in thousands):
Product Category Three Months Ended July 31, 2020 Three Months Ended July 31, 2019
Fresh, vacuum-sealed chicken $ 303,746  $ 365,446 
Fresh, chill-packed chicken 395,110  301,795 
Fresh, ice-packed chicken 133,302  146,117 
Prepared chicken 52,305  67,825 
Frozen chicken 67,094  58,073 
Other 4,898  5,896 
Total net sales $ 956,455  $ 945,152 

Product Category Nine Months Ended July 31, 2020 Nine Months Ended July 31, 2019
Fresh, vacuum-sealed chicken $ 880,300  $ 956,228 
Fresh, chill-packed chicken 1,025,542  839,563 
Fresh, ice-packed chicken 384,563  378,576 
Prepared chicken 142,497  187,216 
Frozen chicken 175,955  150,773 
Other 15,387  21,413 
Total net sales $ 2,624,244  $ 2,533,769 
NOTE 3—INVENTORIES
Inventories consisted of the following (in thousands):
Inventory type July 31, 2020 October 31, 2019
Live poultry-broilers and breeders $ 191,863  $ 179,870 
Feed, eggs and other 42,677  47,417 
Processed poultry 32,922  35,121 
Prepared chicken 9,934  20,032 
Packaging materials 8,545  7,488 
Total Inventories $ 285,941  $ 289,928 
NOTE 4—PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net, consisted of the following (in thousands):
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Description July 31, 2020 October 31, 2019
Land and buildings $ 921,571  $ 892,089 
Machinery and equipment 1,322,257  1,236,095 
Work-in-process 34,943  11,149 
2,278,771  2,139,333 
Less accumulated depreciation 1,049,000  953,473 
Property, plant and equipment, net $ 1,229,771  $ 1,185,860 

NOTE 5—STOCK COMPENSATION PLANS
Refer to Note 9 and Note 10 of the Company’s October 31, 2019 audited financial statements in the Company's 2019 Annual Report on Form 10-K for further information on our employee benefit plans and stock based compensation plans, respectively. Total stock based compensation expense during the three and nine months ended July 31, 2020 was $2.3 million and $7.5 million, respectively, as compared to total stock based compensation expense of $3.8 million and $9.7 million, respectively, for the three and nine months ended July 31, 2019.
During the nine months ended July 31, 2020, participants in the Company’s Management Share Purchase Plan ("MSPP") elected to receive a total of 6,616 shares of restricted stock at an average price of $132.79 per share instead of a specified percentage of their cash compensation, and the Company issued 1,580 matching restricted shares. During the three and nine months ended July 31, 2020, the Company recorded compensation expense for the MSPP shares, included in the total stock based compensation expense above, of $48,000 and $152,000, respectively, as compared to $63,000 and $259,000, respectively, during the three and nine months ended July 31, 2019.
During fiscal 2020, 2019 and 2018, the Company entered into performance share agreements that grant certain officers and key employees the right to receive shares of the Company's common stock, subject to the Company's achievement of certain performance measures. The performance share agreements specify a target number of shares that a participant can receive based upon the Company's average return on equity and average return on sales, as defined, during a two-year performance period beginning November 1 of each performance period. Although the performance share agreements have a two-year performance period, there is an additional one-year period during which the participant must remain employed by the Company before the shares are paid out. If the Company's average return on equity and average return on sales meet or exceed certain threshold amounts for the performance period, participants will receive 50 percent to 200 percent of the target number of shares, depending upon the Company's level of performance. Accruals for performance shares begin during the period management determines that achievement of the applicable performance based criteria is probable at some level. In estimating the probability of the number of shares that will be awarded, the Company considers, among other factors, current and projected grain costs and chicken volumes and pricing, as well as the amount of the Company's commitments to procure grain at a fixed price throughout the performance period. Due to the high level of volatility of these commodity prices and the impact that the change in pricing can have on the Company's results, the Company's assessment of probability can change from period to period and can result in a significant revision to the amounts accrued related to the arrangements, as the accruals are adjusted using the cumulative catch-up method of accounting.
The target number of shares specified in the performance share agreements executed on November 1, 2019 totaled 56,575. As of July 31, 2020, the Company could not determine that achievement of the applicable performance based criteria is probable due to operating results to date and the uncertainties discussed above, and therefore recorded no compensation expense related to those agreements.
The Company also has performance share agreements in place with certain officers and key employees that were entered into on November 1, 2018. The target number of shares specified in those agreements totaled 74,650. As of July 31, 2020, the Company could not determine that achievement of the applicable performance based criteria is probable due to operating results to date and the uncertainties discussed above, and therefore recorded no compensation expense related to those agreements.
The Compensation Committee of the Company's Board of Directors has determined that the performance share agreements entered into on November 1, 2017 have been earned at a level between the threshold and target levels for the return on sales criterion and that the threshold level for the return on equity criterion was not achieved. The shares earned as a result of achieving the return on sales criterion are subject to the satisfaction of the additional one-year service period ending on October 31, 2020. Accordingly, the three and nine months ended July 31, 2020 include compensation expense of $162,000 and
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$509,000, respectively, related to those agreements, as compared to compensation expense of $1.2 million during the three and nine months ended July 31, 2019. Because management's initial determination of probability was made during the third quarter of fiscal 2019 and because the accrual is made using the cumulative catch-up method, the compensation expense recorded during the first nine months of fiscal 2019 related to the agreements entered into on November 1, 2017 was greater than that recorded during the first nine months of fiscal 2020. As of July 31, 2020, the aggregate number of shares estimated to be awarded related to the performance share agreements entered into on November 1, 2017 totaled 13,093 shares. Because the performance period for those agreements has ended, the actual number of shares that will be awarded can change only due to potential forfeitures during the remaining three months of the service period ending October 31, 2020. The Company will recognize the remaining $162,000 of unearned compensation related to these shares over the remaining service period.
Had the Company determined that it was probable that the maximum amount of those outstanding awards from the agreements entered into on November 1, 2018 and November 1, 2019 would be earned, an additional $8.8 million and $4.5 million, respectively, would have been accrued as of July 31, 2020.
The Company's compensation cost related to performance share agreements is summarized as follows (in thousands, except number of shares):
Three Months Ended Nine Months Ended
Date of Performance Share Agreement Number of shares issued (actual (a) or estimated (e)) July 31, 2020 July 31, 2019 July 31, 2020 July 31, 2019
November 1, 2016 84,511 (a) $   $ 596  $   $ 1,859 
November 1, 2017 13,093 (e) 162  1,212  509  1,212 
November 1, 2018 (1) — (e)        
November 1, 2019 (1) — (e)        
Total compensation cost $ 162  $ 1,808  $ 509  $ 3,071 
Note (1) - As of July 31, 2020, the Company could not determine that achievement of the applicable performance-based criteria is probable for the agreements entered into on November 1, 2018 and November 1, 2019, due to the uncertainties discussed above, and therefore recorded no compensation expense related to those agreements.
On November 1, 2019, the Company granted 56,575 shares of restricted stock to certain officers and key management employees. The restricted stock had a grant date fair value of $159.76 per share and will vest on November 1, 2023. On February 13, 2020, the Company granted an aggregate of 12,100 shares of restricted stock to all of its non-employee directors. The restricted stock had a grant date fair value of $136.76 per share and vests one, two or three years from the date of grant. The Company also has unvested restricted stock grants outstanding that were granted during prior fiscal years to its officers, key employees and outside directors. The aggregate number of shares outstanding at July 31, 2020 related to all unvested restricted stock grants totaled 263,053. During the three and nine months ended July 31, 2020, the Company recorded compensation expense, included in the total stock based compensation expense above, of $2.1 million and $6.8 million, respectively, related to restricted stock grants, as compared to $1.9 million and $6.3 million, respectively, during the three and nine months ended July 31, 2019. The Company had $15.1 million in unrecognized share-based compensation costs as of July 31, 2020, which will be recognized over a weighted average remaining vesting period of approximately 1 year, 10 months.
NOTE 6—EARNINGS PER SHARE
Certain share-based payment awards described in Note 5 - Stock Compensation Plans above entitling holders to receive non-forfeitable dividends before vesting are considered participating securities and thus are included in the calculation of basic earnings per share, to the extent they are dilutive. These awards are included in the calculation of basic earnings per share under the two-class method. The two-class method allocates earnings for the period between common shareholders and other security holders. The participating awards receiving dividends are allocated the same amount of income as if they were vested shares.
The following tables present earnings per share:
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  Three Months Ended
  July 31, 2020 July 31, 2019
  (in thousands except per share amounts)
Net income $ 32,810  $ 53,362 
Distributed and undistributed (earnings) to unvested restricted stock (432) (766)
Distributed and undistributed earnings to common shareholders—Basic $ 32,378  $ 52,596 
Weighted average shares outstanding—Basic 21,946  21,835 
Weighted average shares outstanding—Diluted 21,946  21,835 
Earnings per common share—Basic $ 1.48  $ 2.41 
Earnings per common share—Diluted $ 1.48  $ 2.41 
Nine Months Ended
July 31, 2020 July 31, 2019
(in thousands except per share amounts)
Net income $ 352  $ 76,165 
Distributed and undistributed (earnings) to unvested restricted stock (4) (1,125)
Distributed and undistributed earnings to common shareholders—Basic $ 348  $ 75,040 
Weighted average shares outstanding—Basic 21,942  21,826 
Weighted average shares outstanding—Diluted 21,942  21,826 
Earnings per common share—Basic $ 0.02  $ 3.44 
Earnings per common share—Diluted $ 0.02  $ 3.44 
NOTE 7—FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company holds certain items that are required to be disclosed at fair value, primarily debt instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A three-level hierarchy is followed for disclosure to show the extent and level of judgment used to estimate fair value measurements:
Level 1 – Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical assets or liabilities as of the reporting date.
Level 2 – Inputs used to measure fair value, other than quoted prices included in Level 1, are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.
Level 3 – Inputs used to measure fair value are unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
Fair values for debt are based on quoted market prices or published forward interest rate curves, and were categorized as Level 2 measurements. As of July 31, 2020 and October 31, 2019, the fair values of the Company's borrowings under its revolving credit facility approximate the carrying values.
NOTE 8—COMMITMENTS AND CONTINGENCIES
Property, Plant and Equipment
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In October 2019, the Company announced plans to construct a new hatchery in Jones County, Mississippi. Upon completion of the project, the Company will relocate its existing hatchery operations from its current, nearby hatchery facility located in Laurel, Mississippi. Construction commenced during the first quarter of fiscal 2020, and initial operations are expected to begin during the first quarter of fiscal 2021. The Company has entered into construction agreements related to the project totaling approximately $14.2 million. The Company estimates the total cost of the project will be approximately $18.5 million, of which $15.0 million is budgeted for fiscal 2020 and $3.5 million is expected to be budgeted for fiscal 2021. As of July 31, 2020, the Company has spent approximately $5.5 million on the project.
Litigation
Between September 2, 2016 and October 13, 2016, Sanderson Farms, Inc. and our subsidiaries were named as defendants, along with 13 other poultry producers and certain of their affiliated companies, in multiple putative class action lawsuits filed by direct and indirect purchasers of broiler chickens in the United States District Court for the Northern District of Illinois. The complaints allege that the defendants conspired to unlawfully fix, raise, maintain, and stabilize the price of broiler chickens, thereby violating federal and certain states’ antitrust laws, and also allege certain related state-law claims. The complaints also allege that the defendants fraudulently concealed the alleged anticompetitive conduct in furtherance of the conspiracy. The complaints seek damages, including treble damages for the antitrust claims, injunctive relief, costs, and attorneys’ fees. As detailed below, the Court has consolidated all of the direct purchaser complaints into one case, and the indirect purchaser complaints into two cases, one on behalf of commercial and institutional indirect purchaser plaintiffs and one on behalf of end-user consumer plaintiffs. The cases are part of a coordinated proceeding captioned In re Broiler Chicken Antitrust Litigation.
On October 28, 2016, the direct and indirect purchaser plaintiffs filed consolidated, amended complaints, and on November 23, 2016, the direct and indirect purchaser plaintiffs filed second amended complaints. On December 16, 2016, the indirect purchaser plaintiffs separated into two cases. On that date, the commercial and institutional indirect purchaser plaintiffs filed a third amended complaint, and the end-user consumer plaintiffs filed an amended complaint.
On January 27, 2017, the defendants filed motions to dismiss the amended complaints in all of the cases, and on November 20, 2017, the motions to dismiss were denied. On February 7, 2018, the direct purchaser plaintiffs filed their third amended complaint, adding three additional poultry producers as defendants. On February 12, 2018, the end-user consumer plaintiffs filed their second amended complaint, in which they also added three additional poultry producers as defendants, along with Agri Stats, Inc. On February 20, 2018, the commercial and institutional indirect purchaser plaintiffs filed their fourth amended complaint. On November 13, 2018, the commercial and institutional indirect purchaser plaintiffs filed their fifth amended complaint, adding three additional poultry producers as defendants. On November 28, 2018, the end-user consumer plaintiffs filed their third amended complaint. On January 15, 2019, the direct purchaser plaintiffs filed their fourth amended complaint, and the commercial and institutional indirect purchaser plaintiffs filed their sixth amended complaint. Both the direct purchaser plaintiffs and the commercial and institutional indirect purchaser plaintiffs added two new poultry producers as defendants, as well as Agri Stats, Inc. On August 6, 2020, the end-user consumer plaintiffs filed a motion for leave to file a fifth amended complaint. Defendants' opposition is due August 28, 2020, and end-user consumer plaintiffs' reply is due September 11, 2020. The parties are currently engaged in discovery.
Between December 8, 2017 and June 12, 2020, additional purported direct-purchaser entities individually brought forty separate suits against 20 poultry producers, including Sanderson Farms and Agri Stats, Inc., in the United States District Court for the Northern District of Illinois, the United States District Court for the District of Kansas, the United States District Court for the Western District of Arkansas, and the United States District Court for the District of Puerto Rico. These suits allege substantially similar claims to the direct purchaser class complaint described above; certain of the suits additionally allege related state-law and common law claims, and related claims under federal and Georgia RICO statutes. Four complaints filed on June 12, 2020 and another complaint amended on July 24, 2020 also plead allegations of federal bid rigging. Those suits filed in the Northern District of Illinois are now pending in front of the same judge as the putative class action lawsuits. On June 26, 2018, the defendants filed a motion to transfer the case filed in the District of Kansas to the Northern District of Illinois, and that motion was granted on September 13, 2018. On June 7, 2019, the plaintiffs filed a motion to transfer the case filed in the Western District of Arkansas to the Northern District of Illinois, and that motion was granted on June 11, 2019. On July 24, 2019, one of the defendants filed a motion to transfer the case filed in the District of Puerto Rico to the Northern District of Illinois, and that motion was granted on July 25, 2019. On July 22, 2019, the Company moved to dismiss in part those direct-purchaser complaints that allege claims under federal and Georgia RICO statutes against it. The motion was fully briefed on September 20, 2019, and the Court heard argument on the motion on December 18, 2019. On March 3, 2020, the Court denied the Company's motion. On October 18, 2019, defendants moved to dismiss the case filed by the Commonwealth of Puerto Rico on its behalf and on behalf of its citizens. The motion was fully briefed on January 21, 2020. On July 15, 2020, the Court dismissed Puerto Rico’s claims on behalf of its citizens. On July 2, 2020 and August 6, 2020, certain defendants, including the Company, moved to exclude bid rigging allegations and claims from the consolidated In re Broiler Chicken Antitrust Litigation.
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Plaintiffs filed oppositions on August 6, 2020 and August 20, 2020, and defendants filed a reply on August 20, 2020. Defendants' further reply is due on September 3, 2020. The parties are currently engaged in discovery, subject to the COVID-19-related delays discussed below. It is possible additional individual actions may be filed.
The Company is aware that certain plaintiffs’ counsel in In re Broiler Chicken Antitrust Litigation received from the United States Department of Justice, Antitrust Division, a subpoena that included a request to produce all discovery in the case to a grand jury. On June 27, 2019, the Court in In re Broiler Chicken Antitrust Litigation permitted the United States Department of Justice to intervene in the case, as well as ordered certain discovery stayed until September 27, 2019. Before the discovery stay expired on September 27, 2019, the United States Department of Justice asked the Court in In re Broiler Chicken Antitrust Litigation to extend the discovery stay for an additional six months. On September 25, 2019, the Court granted the additional stay of not less than three months. On October 16, 2019, after further consideration, the Court extended the stay until June 27, 2020. On December 18, 2019, the Court after further consideration ordered that the stay be lifted on March 31, 2020.
The Company received a grand jury subpoena in connection with the United States Department of Justice Antitrust Division investigation on September 9, 2019. The Company is complying with the subpoena and providing documents and information as requested by the Department of Justice in connection with its investigation.
Since March 16, 2020, given the current COVID-19 public health emergency, the Northern District of Illinois issued three orders extending all deadlines in civil cases by 21 days, 28 days and 28 days, respectively, and two orders that did not extend any deadlines, but explained other court procedures to protect the public health and welfare. These orders apply to the litigation described above. The Northern District of Illinois will vacate, amend or extend the Fourth Amended General Order on or before September 14, 2020.
We intend to continue to defend the lawsuits vigorously; however, the Company cannot predict the outcome of these actions. If the plaintiffs were to prevail or the Department of Justice were to pursue charges, the Company could be liable for damages or other sanctions, which could have a material, adverse effect on our financial position and results of operations.
On January 30, 2017, the Company received a letter from an attorney representing a putative shareholder demanding that the Company take action against current and/or former officers and directors of the Company for alleged breach of their fiduciary duties. The shareholder asserted that the officers and directors (i) failed to take any action to stop the alleged antitrust conspiracy described above, despite their alleged knowledge of the conspiracy, and (ii) made and/or caused the Company to make materially false and misleading statements by failing to disclose the alleged conspiracy. The shareholder also asserted that certain directors engaged in “insider sales” from which they improperly benefited. In addition to demanding that the officers and directors be sued, the shareholder also demanded that the Company adopt unspecified corporate governance improvements. On February 9, 2017, pursuant to statutory procedures available in connection with demands of this type, the Company’s board of directors appointed a special committee of qualified directors to determine, after conducting a reasonable inquiry, whether it was in the Company’s best interests to pursue any of the actions demanded in the shareholder’s letter. On April 26, 2017, the special committee reported to the Company’s board of directors its determination that it was not in the Company’s best interests to take any of the demanded actions at that time, and that no governance improvements related to the subject matter of the demand were needed. On May 5, 2017, the special committee’s counsel informed the shareholder’s counsel of the committee’s determination. As of the date of filing of this report, and to the Company’s knowledge, no legal proceedings related to the shareholder’s demand have been filed.
On January 27, 2017, Sanderson Farms, Inc. and our subsidiaries were named as defendants, along with four other poultry producers and certain of their affiliated companies, in a putative class action lawsuit filed in the United States District Court for the Eastern District of Oklahoma. On March 27, 2017, Sanderson Farms, Inc. and our subsidiaries were named as defendants, along with four other poultry producers and certain of their affiliated companies, in a second putative class action lawsuit filed in the United States District Court for the Eastern District of Oklahoma. The Court ordered the suits consolidated into one proceeding, and on July 10, 2017, the plaintiffs filed a consolidated amended complaint. The consolidated amended complaint alleges that the defendants unlawfully conspired by sharing data on compensation paid to broiler farmers, with the purpose and effect of suppressing the farmers’ compensation below competitive levels. The consolidated amended complaint also alleges that the defendants unlawfully conspired to not solicit or hire the broiler farmers who were providing services to other defendants. The consolidated amended complaint seeks treble damages, costs and attorneys’ fees. On September 8, 2017, the defendants filed a motion to dismiss the amended complaint, on October 23, 2017, the plaintiffs filed their response, and on November 22, 2017, the defendants filed a reply. On January 19, 2018, the Court granted the Sanderson Farms defendants’ motion to dismiss for lack of personal jurisdiction.
On February 21, 2018, the plaintiffs filed a substantially similar lawsuit in the United States District Court for the Eastern District of North Carolina against Sanderson Farms and our subsidiaries and another poultry producer. The plaintiffs
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subsequently moved to consolidate this action with the Eastern District of Oklahoma action in the Eastern District of Oklahoma for pre-trial proceedings, with the defendants in support thereof. That motion was denied. On July 13, 2018, the defendants moved to dismiss the lawsuit in the Eastern District of North Carolina, and briefing was completed on September 4, 2018. On January 15, 2019, the Court granted in part the defendants’ motion to dismiss and stayed the action in the Eastern District of North Carolina pending resolution of the action in the Eastern District of Oklahoma. On January 6, 2020, the Court in the Eastern District of Oklahoma denied defendants’ motion to dismiss. On January 27, 2020, plaintiffs in the Oklahoma case moved for leave to amend their complaint. The Court in the Eastern District of Oklahoma granted the plaintiffs’ motion, and the plaintiffs filed a consolidated amended complaint on February 21, 2020. The Oklahoma case is ongoing. On May 27, 2020, the Company moved to dismiss the action in the Eastern District of North Carolina under the first-to-file rule. Plaintiffs filed their opposition on June 17, 2020, and the Company filed its reply on July 1, 2020. The motion is fully briefed and awaiting the Court’s decision. We intend to defend the Eastern District of North Carolina case vigorously; however, the Company cannot predict the outcome of this action. If the plaintiffs were to prevail, the Company could be liable for damages, which could have a material, adverse effect on our financial position and results of operations.
On February 21, 2017, Sanderson Farms, Inc. received an antitrust civil investigative demand from the Office of the Attorney General, Department of Legal Affairs, of the State of Florida. Among other things, the demand seeks information related to the Georgia Dock Index and other information on poultry and poultry products published by the Georgia Department of Agriculture and its Poultry Market News division. The Company is cooperating fully with the investigative demand, and we have responded to all requests received to date; however, we are unable to predict its outcome at this time. Separately, the Company has become aware that certain plaintiffs’ counsel in In re Broiler Chicken Antitrust Litigation received from the Office of the Attorney General, Department of Legal Affairs, of the State of Florida, an antitrust civil investigative demand that includes a request to produce all documents submitted by the recipients to the Department of Justice relating to In re Broiler Chicken Antitrust Litigation. The Company is also aware that certain plaintiffs’ counsel in In re Broiler Chicken Antitrust Litigation received from the Louisiana Department of Justice - Office of the Attorney General a Civil Investigation Demand that included a request to produce all deposition transcripts from the civil litigation. On August 6, 2020, the Company received a Civil Investigative Demand from the Office of the Attorney General for the State of Washington seeking information in connection with its investigation of alleged conspiracies in restraint of trade or commerce in the market for broiler chicken. The Company is cooperating with the investigative demand and coordinating with the Office of the Attorney General with respect to responding to its requests. The Company is unable to predict the outcome of the investigation at this time.
On June 22, 2017, the Company was named as a defendant in a lawsuit filed in the United States District Court for the Northern District of California. The complaint, which was brought by three non-profit organizations (the Organic Consumers Association, Friends of the Earth, and Center for Food Safety) alleged that the Company is violating the California Unfair Competition Law and the California False Advertising Law by representing that its poultry products are “100% Natural” products raised with “100% Natural” farming procedures. Among other things, the plaintiffs alleged that the Company’s products contain residues of human and animal antibiotics, other pharmaceuticals, hormones, steroids, and pesticides. Plaintiffs sought an order enjoining the Company from continuing its allegedly unlawful marketing program and requiring the Company to conduct a corrective advertising campaign; an accounting of the Company’s profits derived from the allegedly unlawful marketing practices; and attorneys’ fees, costs and interest. On August 2, 2017, the Company moved to dismiss the lawsuit on various grounds. On August 23, 2017, the plaintiffs filed an amended complaint, which included substantially similar allegations as the original complaint, and the Company filed a motion to dismiss the amended complaint on September 13, 2017. On February 9, 2018, the Court denied the Company’s motion to dismiss. An initial scheduling conference was held on March 1, 2018, and discovery started thereafter. On June 25, 2018, the plaintiffs amended their complaint for a second time, including to remove allegations that USDA had found the Company’s chicken samples to contain residues of antibiotics or other substances. On July 9, 2018, the Company filed a motion to dismiss the second amended complaint. On July 18, 2018, during the pendency of that motion, the parties stipulated to the voluntary dismissal of one of the plaintiff organizations (the Organic Consumers Association). The other two plaintiffs continued to prosecute their claims. On September 11, 2018, the Court granted the motion to dismiss the second amended complaint with leave to amend the complaint, and on October 2, 2018, the remaining plaintiffs filed a third amended complaint. The third amended complaint alleged that the Company misleads consumers with regard to (1) the presence of unnatural residues in its chicken products; (2) the fact that it uses antibiotics in raising its chickens; (3) the conditions in which it raises its chickens; and (4) the risks of human antibiotic resistance caused by the Company’s use of antibiotics. On October 16, 2018, the Company filed a motion to dismiss the third amended complaint, and on December 3, 2018, the Court denied that motion. Fact discovery concluded on March 18, 2019. On April 1, 2019, the Company filed a motion to dismiss for lack of subject matter jurisdiction on grounds that the remaining plaintiffs lacked standing. The Court held a hearing on the Company’s motion on May 30, 2019. On July 31, 2019, the Court granted the Company’s motion without prejudice, stating that dismissal for lack of standing must be without prejudice, but denied the plaintiffs leave to amend their complaint. On October 8, 2019, the Court taxed $12,701 in costs in favor of the Company as the prevailing party.
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On August 30, 2019, plaintiffs filed a notice of appeal of the District Court’s order of dismissal before the United States Court of Appeals for the Ninth Circuit. Plaintiffs’ filed their opening brief on appeal on January 8, 2020, the Company filed its response brief on March 9, 2020, and Plaintiffs filed their reply brief on April 29, 2020. Oral argument is scheduled for October 13, 2020. We intend to vigorously defend the appeal. However, the Company cannot predict the outcome of this action. If the plaintiffs were to prevail, the Company’s reputation and marketing program could be materially, adversely affected, which could have a material, adverse effect on our financial position and results of operations.
On August 30, 2019, Sanderson Farms, Inc. and its Foods and Processing Divisions, as well as seventeen other poultry producers and their affiliates; Agri Stats, Inc.; and Webber, Meng, Sahl and Company, Inc. (“WMS”), were named in a putative class action filed in the United States District Court for the District of Maryland. Three other nearly identical putative class action complaints, each seeking to represent the same putative class, also were filed. The complaints, brought on behalf of non-supervisory production and maintenance employees at broiler chicken processing plants, alleged that the defendants unlawfully conspired by agreeing to fix and depress the compensation paid to them, including hourly wages and compensation benefits, from January 1, 2009 to the present. The plaintiffs claim that broiler producers shared competitively sensitive wage and benefits compensation information in three ways: (1) attending in-person meetings in Destin, Florida; (2) receiving Agri Stats reports, as well as surveys taken and published by WMS; and (3) directly exchanging wage and benefits information with plant managers at other defendant broiler producers. Plaintiffs allege that this conduct violated the Sherman Antitrust Act.
On November 12, 2019, the Court ordered that the four putative class action complaints would be consolidated for all pretrial purposes. The Court ordered plaintiffs to file their consolidated complaint on or before November 14, 2019. Defendants’ motions to dismiss the consolidated complaint were filed on November 22, 2019. Briefing was scheduled to be completed on or before February 28, 2020; however, after the defendants filed their motions to dismiss, on November 26, 2019, plaintiffs notified defendants that they intended to file an amended consolidated complaint. Plaintiffs filed an amended consolidated complaint on December 20, 2019. Plaintiffs name as defendants Sanderson Farms, Inc. and its Foods and Processing Divisions, as well as ten other broiler chicken producers and their affiliates; three turkey producers and their affiliates; Agri Stats, Inc.; and WMS. Plaintiffs bring their amended consolidated complaint on behalf of employees at broiler chicken and turkey processing plants and allege that the defendants unlawfully conspired by agreeing to fix and depress the compensation paid to them. On January 9, 2020 and January 27, 2020, the court approved the voluntary dismissal without prejudice of two of the three nearly identical putative class action lawsuits. On March 12, 2020, the Court approved the voluntary dismissal without prejudice of the third nearly identical putative class action lawsuit.
On March 2, 2020, defendants moved to dismiss the amended consolidated complaint. The Company also filed an individual motion to dismiss plaintiffs’ claims against the Company. Plaintiffs’ oppositions were originally due on April 24, 2020 and defendants’ replies were due on May 21, 2020. However, on March 20, 2020, the District of Maryland issued Second Amended Standing Order 2020-02, extending all filing deadlines set to fall between March 16, 2020 and April 24, 2020 by 42 days. On April 10, 2020, the District of Maryland issued Standing Order 2020-07, extending all filing deadlines set to fall between March 16, 2020 and June 5, 2020 by 84 days. On May 22, 2020, the District of Maryland issued Standing Order 2020-11, which affirmed the prior Order's 84-day extension, but did not extend deadlines further. Pursuant to Standing Order 2020-07, plaintiffs’ filed their omnibus opposition to defendants’ motions to dismiss on July 17, 2020. Defendants filed replies on August 13, 2020. The motion is fully briefed and awaiting the Court's decision. No discovery has taken place to date. We intend to defend this case vigorously; however, the Company cannot predict the outcome of these actions. If the plaintiffs were to prevail, the Company could be liable for damages, which could have a material, adverse effect on our financial position and results of operations.
On October 11, 2019, three named plaintiffs - Daniel Lentz, Pam La Fosse, and Marybeth Norman - filed, in the United States District Court for the Northern District of California, a nationwide class action against the Company on behalf of a putative class of all individuals and businesses throughout the United States who purchased one or more of the Company's chicken products in the prior four years. The lawsuit alleges that the named plaintiffs and other class members purchased the Company's chicken products based on misleading representations in the Company’s advertising. Specifically, the plaintiffs in this case allege that the Company’s advertising (including, but not limited to, on its website, television commercials, radio advertisements, social media, print magazines, billboards, and trucks) misleads consumers into believing that (i) the Company’s chickens were not given antibiotics or other pharmaceuticals, (ii) the chickens were raised in a “natural” environment, (iii) there is no evidence that the use of antibiotics or other pharmaceuticals in poultry contributes to the evolution of antibiotic-resistant bacteria, and (iv) the Company’s chicken products do not contain antibiotic or pharmaceutical residues. Plaintiffs allege that (i) the Company “routinely” feeds antibiotics and pharmaceuticals to its chickens, (ii) the Company raises its chickens indoors in “unnatural” indoor conditions amounting to “intensive confinement” and without natural light (iii) there is “extensive” reliable evidence that the use of antibiotics in poultry contributes to antibiotic-resistant bacteria, and (iv) the Company’s chickens have been found to contain antibiotic and pharmaceutical residue. The original Complaint asserted five causes of action under California and North Carolina law. The plaintiffs sought injunctive relief directing the Company to correct its practices and to
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comply with consumer protection laws nationwide. The plaintiffs also sought monetary, compensatory, statutory, and punitive damages, as well as attorneys’ and experts’ fees, costs, and expenses. On December 20, 2019, the Company filed a motion to dismiss. On February 10, 2020, the Court granted the motion to dismiss in part, denied it in part, and granted the plaintiffs leave to amend the Complaint. On March 23, 2020, two of the three original plaintiffs (Pam La Fosse and Marybeth Norman) filed a First Amended Class Action Complaint in which they were joined by five additional named plaintiffs. The core allegations and theories set forth in the First Amended Complaint are the same as in the original complaint. The First Amended Complaint asserts one cause of action under federal law and sixteen causes of action under the laws of various states. The plaintiffs again seek injunctive relief directing the Company to correct its practices and to comply with consumer protection laws nationwide, as well as monetary, compensatory, statutory and punitive damages and attorneys' and experts' fees, costs and expenses. On May 6, 2020, the Company filed a motion to dismiss the First Amended Complaint, which the Court granted on July 2, 2020 with leave to amend. On July 23, 2020, Plaintiffs Pam La Fosse and Sharon Manier filed a Second Amended Complaint on behalf of a putative class of consumers who purchased the Company’s chicken in California in the prior four years. Like the earlier iterations of the complaint, the Second Amended Complaint alleges that the remaining plaintiffs and other class members purchased the Company’s chicken products based on misleading representations in the Company’s advertising, including for the reasons set forth in the prior complaints. On August 6, 2020, the Company moved to dismiss the Second Amended Complaint in part, requesting dismissal of plaintiffs' new implied warranty of merchantability claim. On August 20, 2020, plaintiffs voluntarily agreed to withdraw their new implied warranty claim. No discovery has taken place to date. We intend to defend these cases vigorously; however, the Company cannot predict the outcome of these actions. If the plaintiffs were to prevail, the Company could be liable for damages, which could have a material, adverse effect on our financial position and results of operations.
On July 31, 2020, two non-profit organizations (In Defense of Animals and Friends of the Earth) filed a complaint against the Company in the United States District Court for the Northern District of California. The complaint asserts substantially similar (and in many cases identical) allegations and claims against the Company as the prior case brought by Friends of the Earth and other organizations, which the court dismissed in July 2019 and which is currently on appeal to the United States Court of Appeals for the Ninth Circuit. Specifically, the plaintiffs assert that the Company is violating the California Unfair Competition Law and the California False Advertising Law by representing that its poultry products are “100% Natural” products raised with “100% Natural” farming procedures. Plaintiffs allege that the Company’s advertising (including, but not limited to, on its website, television commercials, radio advertisements, social media, print magazines, billboards, and trucks) misleads consumers into believing that (i) the Company’s chickens were not given antibiotics or other pharmaceuticals, (ii) the chickens were raised in a “natural” environment, (iii) there is no evidence that the use of antibiotics or other pharmaceuticals in poultry contributes to the evolution of antibiotic-resistant bacteria, and (iv) the Company’s chicken products do not contain antibiotic or pharmaceutical residues. Plaintiffs allege that (i) the Company “routinely” feeds antibiotics and pharmaceuticals to its chickens, (ii) the Company raises its chickens indoors in “unnatural” indoor conditions amounting to “intensive confinement” and without natural light, (iii) there is “extensive” reliable evidence that the use of antibiotics in poultry contributes to antibiotic-resistant bacteria, and (iv) the Company’s chickens have been found to contain antibiotic and pharmaceutical residue. The plaintiffs seek injunctive relief directing the Company to correct its practices and to comply with consumer protection laws nationwide as well as in the form of a corrective advertising campaign. The plaintiffs also sought monetary, compensatory, statutory, and punitive damages, as well as attorneys’ and experts’ fees, costs, and expenses. On August 12, 2020, the Company agreed to waive service of the complaint. The Company's response to the complaint is due on October 6, 2020. No discovery has taken place to date. We intend to defend this case vigorously; however, the Company cannot predict the outcome of these actions. If the plaintiffs were to prevail, the Company could be liable for damages, which could have a material, adverse effect on our financial position and results of operations.
The Company is involved in various other claims and litigation incidental to its business. Although the outcome of these matters cannot be determined with certainty, management, upon the advice of counsel, is of the opinion that the final outcome of currently pending matters, other than those discussed above, should not have a material effect on the Company’s consolidated results of operations or financial position.
The Company recognizes the costs of legal defense for the legal proceedings to which it is a party in the periods incurred. After a considerable analysis of each case, the Company has determined that no accrual is required for any of the foregoing matters as of July 31, 2020. Future reserves may be required if losses are deemed reasonably estimable and probable due to changes in the Company’s assumptions, the effectiveness of legal strategies, or other factors beyond the Company’s control. Future results of operations may be materially affected by the creation of reserves or by accruals of losses to reflect any adverse determinations in these legal proceedings.
NOTE 9—CREDIT AGREEMENT
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The Company is a party to a revolving credit facility dated March 21, 2019, with a maximum available borrowing capacity of $1.0 billion. Under the credit facility, the Company may not exceed a maximum debt to total capitalization ratio of 50%. The Company has a one-time right, at any time during the term of the agreement, to increase the maximum debt to total capitalization ratio then in effect by five percentage points in connection with the construction of a new poultry complex for the four fiscal quarters beginning on the first day of the fiscal quarter during which the Company gives written notice of its intent to exercise this right. The Company has not exercised this right. The facility also sets a minimum net worth requirement that at July 31, 2020, was $1,014.9 million. The credit is unsecured and, unless extended, will expire on March 21, 2024. As of July 31, 2020 and August 26, 2020, the Company had borrowed $95.0 million, and had approximately $19.8 million outstanding in letters of credit, leaving $885.2 million of borrowing capacity available under the facility.
NOTE 10—INCOME TAXES
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("the CARES Act") was enacted. The CARES Act contains several income tax provisions, as well as other measures, that are intended to assist businesses impacted by the economic effects of the COVID-19 pandemic. The most significant provisions of the CARES Act that materially affect our accounting for income taxes include, but are not limited to, a five-year carry-back allowance for taxable net operating losses generated in tax years 2018 through 2020, our fiscal years 2019 through 2021, and a technical correction to the Tax Cut and Jobs Act, enacted on December 22, 2017, that provides a two-year carry-back allowance for our taxable net operating loss generated in fiscal year 2018.
Our financial statements for the nine months ended July 31, 2020 were materially affected by the changes enacted by the CARES Act. U.S. GAAP requires that the effects from changes in tax laws be recognized in the period in which the new law is enacted, which for the CARES Act was our second quarter of fiscal 2020. As a result of the applicable accounting guidance and the provisions enacted by the CARES Act, our income tax provision for the nine months ended July 31, 2020 reflects the carry-back of taxable net operating losses generated during periods in which the statutory federal income tax rate was 21% to periods in which the statutory federal income tax rate was 35%. Due to the difference in statutory rates, we recorded a $49.5 million discrete income tax benefit related to the carry-back provisions during the nine months ended July 31, 2020. Because the net operating losses were carried back to years in which we initially reduced our taxable income using the Domestic Production Activities Deduction, we recorded a partially offsetting $11.4 million discrete income tax expense during the nine months ended July 31, 2020 to account for the reduced taxable income.
The Company’s effective tax rates for the three and nine months ended July 31, 2020 were 15.5% and 100.6%, respectively, as compared to estimated annual effective tax rates of 20.7% and 21.7%, respectively, for the three and nine months ended July 31, 2019. Excluding the effects of discrete items recognized during the periods, primarily related to the CARES Act, the Company's effective tax rates for the three and nine months ended July 31, 2020 would have been approximately 18.2% and 32.7%, respectively, as compared to estimated annual effective tax rates of 24.1% and 24.2%, respectively, for the three and nine months ended July 31, 2019. Normally during interim periods, the Company has estimated its annual effective tax rate for the full fiscal year to use when recording the interim period tax provision. Given significant volatility in the poultry markets as a result of the COVID-19 pandemic, as well as factors related to the carry-back provisions of the CARES Act, the Company is not able to reliably estimate its annual effective tax rate for the interim period ending July 31, 2020. Therefore, the income tax provision for the third quarter and first nine months of fiscal 2020 was made using the actual effective tax rate for the nine-month period ending July 31, 2020.
As of July 31, 2020, the Company's deferred income tax liability was $135.3 million as compared to $74.1 million at October 31, 2019, an increase of $61.2 million. This increase is primarily attributable to the carry-back provisions discussed above, as well as bonus depreciation taken on qualifying assets placed in service during fiscal 2020.
NOTE 11—LEASES
The Company, using the guidance in Accounting Standards Codification ("ASC") 842, Leases, determines if an agreement is a lease at the inception of the agreement, and when a lease exists, we follow the guidance in ASC 842 to determine whether the lease is an operating or finance lease. The Company is a party to certain agreements that are classified as operating leases, and those are recorded on our Condensed Consolidated Balance Sheet as Right of Use Assets, Current Lease Liabilities, and Long-term Lease Liabilities. The Company is not a party to any finance lease arrangements. The Company has elected not to record short-term leases with initial terms of twelve months or less in our Condensed Consolidated Balance Sheet. Lease expenses related to those short-term leases are recognized on a straight-line basis over the term of the lease.
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The initial assets and corresponding liabilities recorded at commencement of our operating leases are based on the present value of the future minimum lease payments over the lease term. In determining the present value, we use the implicit interest rate in the agreement, if provided. If an implicit interest rate is not provided, we determine the present value of the future minimum lease payments using our incremental borrowing rate based on available information at the lease commencement. When lease agreements contain residual value guarantees that are considered probable, those are included in calculating the amount of lease liabilities to record. Operating lease expense is recognized on a straight-line basis over the lease term with a corresponding reduction to the Right of Use Asset and the applicable lease liability. Lease expense is classified as Cost of Sales or Selling, General and Administrative in our Condensed Consolidated Statements of Operations based on the use of the leased item.
The operating leases to which the Company is a party are primarily related to transportation equipment, equipment used in production processes and the assets of independent contract producers who house our live birds. A significant portion of the costs associated with leases related to the use of assets of independent contract poultry producers who house and care for our live birds are for non-lease components of our agreements with such producers. Non-lease components of payments made to independent contract poultry producers include those related to the operating costs of, and services provided by, such producers. For costs associated with such leases, we elected to account for the lease and non-lease components as a single lease component, and all costs associated with such leases are disclosed as variable lease costs in the table below. The following table presents the components of our lease costs (in thousands) paid during the three and nine months ended July 31, 2020:
Description Three Months Ended July 31, 2020 Nine Months Ended July 31, 2020
Operating lease cost $ 3,743  $ 12,011 
Short-term lease cost 744  2,531 
Variable lease cost (1)
106,166  310,106 
Total lease cost $ 110,653  $ 324,648 
(1) Variable lease costs are attributable to payments made to independent contract poultry producers and are based on or influenced by output received from contract producers, birds placed, poultry house size and relative performance.
Other information regarding our operating leases includes the following:
Description Amount
Cash outflows for operating leases included in the measurement of lease liabilities during the nine months ended July 31, 2020 (in thousands) $ 12,173 
Non-cash amount of right of use assets and lease liabilities recorded upon adoption (in thousands) (1)
$ 54,665 
Weighted-average remaining lease term as of July 31, 2020 (years) 3.9
Weighted-average discount rate as of July 31, 2020 2.46  %
(1) There were no new right of use assets obtained in exchange for lease liabilities during the nine months ended July 31, 2020.
The future maturities of obligations under non-cancelable operating leases at July 31, 2020 were as follows (in thousands):
Fiscal Year Amount
2020 (remainder) $ 3,584 
2021 14,398 
2022 11,969 
2023 8,327 
2024 4,744 
Thereafter 2,430 
Total undiscounted operating lease payments 45,452 
Less: imputed interest (2,979)
Present value of lease liabilities $ 42,473 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following 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, 2019.
This Quarterly Report, and other periodic reports filed by the Company under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and other written or oral statements made by it or on its behalf, may include forward-looking statements within the meaning of the "Safe Harbor" provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements 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 risks described in the "Risk Factors" section of our latest 10-K and 10-Q reports, and the following:
(1)Changes in the market price for the Company’s finished products and feed grains, both of which may fluctuate substantially and exhibit cyclical characteristics typically associated with commodity markets.
(2)Changes in economic and business conditions, monetary and fiscal policies or the amount of growth, stagnation or recession in the global or U.S. economies, any of which may affect the value of inventories, the collectability of accounts receivable or the financial integrity of customers, and the ability of the end user or consumer to afford protein.
(3)Changes in the political or economic climate, trade policies, laws and regulations or the domestic poultry industry of countries to which the Company or other companies in the poultry industry ship product, and other changes that might limit the Company’s or the industry’s access to foreign markets.
(4)Changes in laws, regulations, and other activities in government agencies and similar organizations applicable to the Company and the poultry industry and changes in laws, regulations and other activities in government agencies and similar organizations related to food safety.
(5)Various inventory risks due to changes in market conditions, including, but not limited to, the risk that net realizable values of live and processed poultry inventories might be lower than the cost of such inventories, requiring a downward adjustment to record the value of such inventories at the lower of cost or net realizable value as required by generally accepted accounting principles.
(6)Changes in and effects of competition, which is significant in all markets in which the Company competes, and the effectiveness of marketing and advertising programs. The Company competes with regional and national firms, some of which have greater financial and marketing resources than the Company.
(7)Changes in accounting policies and practices adopted voluntarily by the Company or required to be adopted by accounting principles generally accepted in the United States.
(8)Disease outbreaks affecting the production, performance and/or marketability of the Company’s poultry products, or the contamination of its products.
(9)Changes in the availability and cost of labor and growers.
(10)The loss of any of the Company’s major customers.
(11)Inclement weather that could hurt Company flocks or otherwise adversely affect the Company's operations, or changes in global weather patterns that could affect the supply and price of feed grains.
(12)Failure to respond to changing consumer preferences and negative or competitive media campaigns.
(13)Failure to successfully and efficiently start up and run a new plant or integrate any business the Company might acquire.
(14)Unfavorable results from currently pending litigation and proceedings, or litigation and proceedings that could arise in the future.
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(15)Changes resulting from the COVID-19 pandemic, which could exacerbate any of the risks described above, and could include: high absentee rates that have prevented and may continue to prevent us from running some of our facilities at full capacity, or could in the future cause facility closures; an inability of our contract growers to manage their flocks; supply chain disruptions for feed grains; further changes in customer orders due to shifting consumer patterns; disruptions in logistics and the distribution chain for our products; liquidity challenges; and a continued or worsening decline in global commercial activity, among other unfavorable conditions.
Readers are cautioned not to place undue reliance on forward-looking statements made by or on behalf of Sanderson Farms. Each such statement speaks only as of the day it was made. The Company undertakes no obligation to update or to revise any forward-looking statements. The factors described above cannot be controlled by the Company. When used in this report, the words “believes,” “estimates,” “plans,” “expects,” “should,” “outlook,” and “anticipates” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. Examples of forward-looking statements include statements about management’s beliefs about future growth plans, earnings, production levels, capital expenditures, grain prices, global economic conditions, supply and demand factors and other industry conditions.
GENERAL
The Company’s poultry operations are integrated through its control of all functions relative to the production of its chicken products, including hatching egg production, hatching, feed manufacturing, raising chickens to marketable age (“grow out”), processing, marketing and distribution. The Company’s prepared chicken product line includes approximately 140 institutional and consumer packaged chicken items that it sells nationally, primarily to distributors and food service establishments. A majority of the prepared chicken items are made to the specifications of food service users.
Consistent with the poultry industry, the Company’s profitability is substantially affected 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. Costs other than feed grain costs, including hatching egg production, hatching, growing, and processing cost, are responsive to efficient cost containment programs and management practices.
COVID-19
During the second quarter of fiscal 2020, the World Health Organization declared COVID-19 a pandemic. The effects of the pandemic and the related governmental actions to contain the spread of the novel coronavirus have materially affected our business, including our labor force, revenues, expenses, production levels, and senior management's time, among other things.
In late February 2020, we formed a COVID-19 response team of senior managers, including our CEO, President and CFO, to coordinate our Company's response to the pandemic and manage and mitigate related risks. The team meets twice daily to discuss COVID-19 developments affecting our business and the communities in which we operate. Additionally, our Board of Directors has actively overseen our management of the crisis. Between March 13, 2020 and early June, the Board met weekly to receive updates and discuss our response to the pandemic with our executive leadership. Since early June, the Board has generally met every two weeks, or more frequently if circumstances warrant.
Our top priority throughout the crisis has been protecting the health, safety and welfare of our over 18,000 employees. In consultation with infectious disease specialists and epidemiologists, including an infectious disease expert who toured our facilities, we have taken a number of steps to promote health and safety in our operations. We also frequently communicate with state and local officials and health departments regarding our practices. Some of our practices are more stringent than those recommended by the Centers for Disease Control and Prevention. Our practices include, but are not limited to:
We implemented strict personal and work-related travel and public gathering restrictions for all of our employees, contractors and members of their households.
We are providing information about the novel coronavirus and measures to mitigate the risk of contracting and transmitting the virus on video displays throughout our facilities and on our employee mobile app. We have also provided live training sessions about the virus to our hourly employees. Each of these aforementioned communications is provided in the languages spoken by our employee population.
We have created an internal hotline monitored by our nurses at our general corporate offices that employees may call to ask questions or voice concerns about the virus.
Non-essential visitors may not enter our facilities.
We are taking the temperature of each person attempting to enter our facilities. Anyone with a temperature of 100°F or higher is denied entry. Employees denied entry are sent home with pay and are asked to contact their healthcare provider.
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Our Company nurses have received specialized training on identifying COVID-19 symptoms. Employees exhibiting symptoms while at work are immediately sent home with pay and are asked to contact a healthcare provider immediately.
Employees who test positive for COVID-19, those who live in the same household as someone who has tested positive, and those who work in close proximity to an employee who has tested positive are sent home to self-quarantine with pay for 14 days. An employee who has tested positive may return to work after 14 days with clearance from a doctor. An employee who lives in the same household as or who works in close proximity to someone who has tested positive may return to work after 14 days if he or she has been symptom-free for 72 hours.
We continuously look for commonalities among our employees who test positive, including geographic concentrations in their places of residence, so we can reduce or prevent the spread of the virus in our facilities.
We sent home for 14 days, with pay, approximately 400 employees who work in our Moultrie, Georgia facility and are residents of a nearby county that experienced a high rate of community infections.
We are providing and requiring employees, United States Department of Agriculture inspectors and essential visitors to wear face masks and face shields. Anyone on the premises of our processing plants, feed mills, hatcheries and vehicle maintenance shops is required to wear this equipment. Where an employee's job function does not permit him or her to wear a face shield, we require the employee to wear safety glasses. In areas of our facilities where space allows, we have implemented social distancing measures, and in areas where equipment configurations allow, we have installed physical barriers between work stations. In areas where social distancing or the installation of physical barriers is not achievable, the use of face shields is mandatory. Additionally, we have optimized ventilation throughout our facilities to mitigate the risk of exposure to the virus. We are also providing and requiring employees and essential visitors at our general corporate offices and our laboratory to wear face masks while in common areas and in instances where social distancing is not achievable.
Our nurses have N95 respirator masks, gowns, gloves and goggles appropriate for contact with potentially infected people.
We require employees to practice social distancing on breaks and have staggered break times to reduce the number of people in break areas at any one time. We have installed physical partitions in our break rooms to provide barriers between employees and have erected tents outside of our facilities to provide employees with more space during breaks.
We have installed additional hand sanitizer stations appropriate for use in food processing facilities at all our facilities.
A third-party sanitation service provider performs an antiviral sanitation process at each of our facilities at least weekly, and we have increased the frequency of cleaning common areas and frequently touched surfaces.
Salaried employees who are considered to be at high risk for severe illness from COVID-19 are permitted to work from home, provided their job duties allow for remote work.
We have closed our Company-owned childcare facility in Collins, Mississippi until further notice.
In certain of our facilities that are located in communities that experienced high infection rates, we cooperated with local health authorities or determined on our own to test all our employees at the facility for coronavirus. Employees who tested positive were sent home with pay for the periods described above. To date, we have performed four facility-wide tests resulting in positive rates per employee tested of 3.3%, 0.5%, 5.8%, and 3.3%.
During the COVID-19 pandemic, we have also provided assistance to our employees including, but not limited to, the following:
As a food producer, we have been designated by the federal government as part of the United States' critical infrastructure with a special responsibility to continue operations. Therefore, we are paying our hourly employees who work all of their scheduled hours during a week an attendance bonus equal to $1.00 per hour.
We enhanced our health plan to provide for 100% coverage of testing and treatment of COVID-19 at no cost to plan participants.
We provided detailed guidance to our employees on the steps to take to ensure timely receipt of the stimulus payment provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
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We have distributed written materials to our employees in all languages appropriate for our employee population to inform them about COVID-19 risks and encourage good personal hygiene, cleaning and social distancing practices away from work and when carpooling to work to protect themselves and their families.
We have given our employees free bottles of hand sanitizer which they may refill from supplies at our facilities.
In appreciation for our employees' dedication and hard work in supporting the nation's food supply, we gave ten pounds of fresh chicken to each hourly employee who worked on Good Friday, ten pounds of fresh chicken to each hourly and salaried employee who worked on the Friday before Mother's Day, and ten pounds of fresh chicken to each hourly and salaried employee who worked on the Friday before Father's Day.
Because demand for the products we produce at our prepared chicken facility significantly decreased during the early stages of the pandemic, we ran fewer shifts at that facility. We assisted our employees at the plant in filing for unemployment benefits due to their reduced work hours.
On Friday, September 4, 2020, we intend to give each employee a washable, reusable mask screen-printed with the slogan "Hero at Work." Employees will also be able to take additional washable, reusable masks home to their family members.
We have continued to serve our customers and support our communities:
As a result of the COVID-19 pandemic, most of the nation's restaurants have been forced to operate at significantly reduced capacity or to close completely. As a result, our retail grocery store customers experienced a surge in demand for food to be prepared at home. Because of the significant decrease in demand from our food service customers, during the second quarter we were able to divert approximately 4.3 million head of chickens from our big bird program to be processed at our plants that serve retail grocery store customers. To accomplish this, we increased the number of shifts at our plants that process retail product, and we have not experienced any significant delays or other hindrances in our shipment of products to our retail grocery store customers.
Since the beginning of the pandemic, we have donated over 900,000 pounds of chicken to employees, food banks and other relief organizations.
Since the beginning of the pandemic, we have donated 23,740 N95 and KN95 masks, approximately 20,000 disposable masks and approximately 250 washable, reusable masks to a number of hospitals in need of personal protective equipment for their front-line healthcare workers.
On March 27, 2020, the CARES Act was enacted. The CARES Act affects the Company in several areas including, but not limited to, the following:
It allows for the deferral of the employer portion of social security payroll tax payments that would have otherwise been paid between the enactment date and December 31, 2020. We are using this provision to increase our available liquidity. As of July 31, 2020, we have deferred approximately $10.5 million that would have been a cash outflow in the absence of the CARES Act, and we currently estimate this provision will result in a total of approximately $26 million of payroll tax payments being deferred, with 50% due during calendar year 2021 and 50% due during calendar year 2022. We intend to remit approximately $22.0 million of the deferred payroll taxes on or before June 15, 2021 and the remaining $4.0 million on or before June 15, 2022, so that we are able to deduct the corresponding payroll tax expenses on our fiscal 2020 and 2021 income tax returns.
Certain refundable, wage-related tax credits, including the Employee Retention Credit, are available to eligible employers. We are currently evaluating the potential impacts of this credit.
The Tax Cuts and Jobs Act enacted in December 2017 disallowed the carrying back of taxable net operating losses to offset prior years' taxable income. The CARES Act allows us to carry those losses back to offset taxable income recognized during prior years. We elected to use that provision, which provided additional liquidity in the form of an income tax refund of approximately $84.4 million, which we received during our third quarter of fiscal 2020 and subsequently used to reduce the amount of outstanding borrowings under our revolving credit facility. Additionally, during the first nine months of fiscal 2020, we recorded a net discrete income tax benefit of approximately $38.1 million related to the carry-back provisions of the CARES Act. For more information regarding the income tax effects of the CARES Act, refer to "Part I., Item 1., Notes to Condensed Consolidated Financial Statements, Note 10 - Income Taxes."
EXECUTIVE OVERVIEW OF RESULTS
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For the third quarter of fiscal 2020, we reported net income of $32.8 million, or $1.48 per share, as compared to net income of $53.4 million, or $2.41 per share during the third quarter of fiscal 2019. Our financial results for the third quarter of fiscal 2020 were significantly affected by the COVID-19 pandemic. The primary impacts were:
Orders from food service customers declined dramatically during the second quarter of fiscal 2020 due to widespread closures or significant reductions in operating capacity of restaurants and other venues where food is consumed away from home. During the third quarter, demand from our largest food service customers fluctuated from week to week with the opening and closing of food service establishments. The average weekly volume sold to our largest food service customers during the quarter ranged from 68% to 95% of normal levels seen before the pandemic. The impact of this fluctuating demand is evidenced by the Urner Barry quote for boneless breast meat. In mid-May, the quoted price reached $1.58 per pound before falling to $0.97 per pound in mid-June and recovering to $1.17 per pound on July 31, 2020. The quoted price has now moved lower again to $1.01 per pound as of August 26, 2020.
The Company announced during its second fiscal quarter that, in response to reduced demand from food service customers caused by the COVID-19 pandemic, it would reduce production at plants processing a larger bird for food service customers. The Company processed 1.23 billion pounds of dressed poultry during the third fiscal quarter of 2020, up 3.5% from the 1.19 billion pounds processed during the third fiscal quarter of 2019. The increase reflects additional production at the Company's new Tyler, Texas facility, partially offset by the COVID-19 related production cuts. The 1.23 billion pounds processed during the third fiscal quarter is approximately 60.0 million, or 4.7%, fewer pounds than estimated prior to the pandemic's effects being known. Given these planned production cuts in response to the decreased demand caused by the pandemic, we estimate our total production during the fourth quarter of fiscal 2020 will be approximately 1.22 billion pounds, lower by 5.0% compared to the fourth quarter of fiscal 2019, and 4.2% lower than our pre-COVID-19 estimate.
The demand shift to food prepared at home caused demand from our retail grocery store customers to surge during the early stages of the pandemic, and that demand remains strong as a result of the reduced options available for dining away from home.
Demand for our products from the export markets was soft during the quarter. Many countries to which we export our products faced myriad issues ranging from lack of liquidity to logistical challenges as a result of COVID-19. These challenges created volatility in most export markets, while demand and pricing for chicken paws sold to China remained stable. Demand from China for dark meat was strong during our second quarter of fiscal 2020 due to the country's protein deficit caused by African swine fever; however, China now has ample supplies of dark meat stored in freezers, and demand has slowed considerably.
Our top priority throughout the crisis has been protecting the health, safety and welfare of our employees. As a result, the quarter includes approximately $15.9 million in direct COVID-19 expenses for payroll expenses for employees who are quarantined, payroll expenses for attendance bonuses paid to hourly employees, and items and services including personal protective equipment, thermometers, barriers and other social-distancing measures, professional cleaning, and additional nursing staff, among other things. Results for the nine months ended July 31, 2020 include a total of approximately $24.3 million in expenses related to these items and services.
Our higher average cost of goods sold during the third quarter of fiscal 2020 as compared to the same quarter a year ago reflects an increase in non-feed related costs of goods sold, details of which are described in the "Results of Operations" section below, partially offset by a decrease in feed costs per pound of chicken processed. When combined, the average cost of corn and soybean meal in chickens processed was lower during the third quarter of fiscal 2020 as compared to the same period a year ago, which resulted in a decrease in feed costs in broiler flocks processed. We have priced most of our corn and soybean meal needs through September 2020. Had we priced our remaining fiscal 2020 grain needs at August 26, 2020 cash market prices quoted on the Chicago Board of Trade, our costs of feed grains based on 2019 volumes would be approximately $46.8 million lower during fiscal 2020 as compared to fiscal 2019, and we estimate those prices would result in approximately 0.83 cents per pound lower feed costs in broiler flocks processed for fiscal 2020 as compared to fiscal 2019. We have not priced any of our corn and soybean meal needs for fiscal 2021.
The outbreak of African swine fever in China has reduced the worldwide supply of pork, which has in turn created a worldwide protein deficit. In November 2019, during our first quarter of fiscal 2020, China lifted its nearly five-year ban on the import of United States poultry, and we resumed shipments to China almost immediately. During the third quarter of fiscal 2020, we sold approximately 18.6 million pounds of chicken paws to customers who resold the product in China. When the ban was in place, we would have rendered the chicken paws for significantly lower returns. Demand for products other than chicken paws softened considerably during our third quarter as cold storage inventories were rebuilt and consumers in China have been slow to return to restaurants in the same numbers as before the COVID-19 outbreak.
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We believe that our overall cost structure during our fourth quarter of fiscal 2020 will be stable, primarily because we have priced most of our grain for the remainder of the fiscal year as noted above. We also believe that demand for our products from retail grocery stores will continue to be strong as people continue to prepare more food at home than prior to the pandemic. We believe this trend will continue to some extent because we expect, among other factors:
people will continue to work from home in higher numbers than before the pandemic;
some restaurants will remain closed, there will be reduced capacity at open restaurants due to social distancing restrictions and some consumers will continue to choose not to dine in restaurants for safety reasons; and
consumers will have lower levels of disposable income due to unemployment and other financial constraints caused by the pandemic.
We also believe that market prices and demand for the products we produce at our plants that serve food service customers will continue to be volatile as our customers and the food service industry as a whole continue to navigate the effects of the pandemic and the related openings and closings of restaurants and other venues where food is consumed away from home.
While demand for our retail grocery products is currently favorable and demand from our food service customers remains volatile, it is uncertain how long these conditions will persist. How long current conditions will last and the future effect of the pandemic on our business will depend on many factors, including:
whether there are resurgences in COVID-19 infections that make people fearful of dining out or cause state, local and foreign governments to reimpose stay-at-home restrictions and order restaurant closures;
the ability of restaurants to survive financially in depressed business conditions, and the extent to which the volume of food sold by restaurants is affected by required social distancing measures that reduce the number of customers they can serve;
whether other venues where people eat food away from home, such as sporting events and hotels, resume or increase operations;
the extent to which unemployment levels and possible recessionary conditions affect the amount of disposable income consumers have to spend on food and how consumers allocate their food dollars;
with respect to our export sales, the condition of the oil market, the relative strength of foreign currencies against the U.S. dollar and political uncertainty that could affect trade relations with other countries, especially with China, and
the effect of the pandemic on our operations, including labor shortages we could experience as a result of infections among our employees.
RESULTS OF OPERATIONS
Net sales for the third quarter ended July 31, 2020 were $956.5 million as compared to $945.2 million for the third quarter ended July 31, 2019, an increase of $11.3 million, or 1.2%. Net sales of poultry products for the third quarter ended July 31, 2020 and 2019, were $903.9 million and $877.0 million, respectively, an increase of $26.9 million, or 3.1%. The increase in net sales of poultry products resulted from a 6.3% increase in the pounds of poultry products sold, partially offset by an 3.0% decrease in the average sales price of poultry products sold. During the third quarter of fiscal 2020, the Company sold 1,221.8 million pounds of poultry products, up from 1,149.6 million pounds during the third quarter of fiscal 2019. The increase in pounds of poultry products sold resulted from a 4.0% increase in the number of head processed, partially offset by a 1.2% decrease in the average live weight of poultry processed. The new Tyler, Texas processing facility, which began initial operations during the first quarter of fiscal 2019, processed approximately 16.9 million head during the third quarter of fiscal 2020, or approximately 10.1% of the total head processed by the Company during the period, and sold approximately 108.4 million pounds of poultry products during the third quarter of fiscal 2020, or approximately 8.9% of the total poultry pounds sold by the Company during the period. By comparison, the Tyler, Texas processing facility processed approximately 7.6 million head during the third quarter of fiscal 2019, or approximately 4.7% of the total head processed by the Company during the period, and sold approximately 51.6 million pounds of poultry products during the third quarter of fiscal 2019, or approximately 4.5% of the total poultry pounds sold by the Company during the period.
Overall, market prices for poultry products decreased during the third quarter of fiscal 2020 as compared to the same quarter of fiscal 2019. When compared to the third quarter of fiscal 2019, Urner Barry average market prices for leg quarters, tenders, boneless thigh meat and jumbo wings decreased by 39.1%, 26.8%, 17.5% and 13.2%, respectively, while average market prices for boneless breast meat increased by 3.2%. Average realized prices for chicken products sold to retail grocery
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store customers increased by 1.8% during the third quarter of fiscal 2020 as compared to the same period of fiscal 2019 and continue to reflect strong demand.
Net sales of prepared chicken products for the quarters ended July 31, 2020 and 2019 were $52.6 million and $68.2 million, respectively, representing a decrease of 22.8%. This decrease is primarily attributable to a 21.5% decrease in the pounds of prepared chicken products sold, while the average sales price of prepared chicken products sold decreased by 1.7%. During the third quarter of fiscal 2020, the Company sold 27.9 million pounds of prepared chicken products, down from 35.6 million pounds during the third quarter of fiscal 2019. The decrease in pounds of prepared chicken products sold resulted from the decrease in demand from our food service customers due to the COVID-19 pandemic, as described above.
Net sales for the first nine months of fiscal 2020 were $2,624.2 million, as compared to $2,533.8 million for the first nine months of fiscal 2019, an increase of $90.5 million, or 3.6%. Net sales of poultry products for the first nine months of fiscal 2020 and 2019 were $2,481.1 million and $2,345.6 million, respectively, an increase of $135.5 million, or 5.8%. The increase in net sales of poultry products resulted from an 8.8% increase in the pounds of poultry products sold, partially offset by a 2.8% decrease in the average sales price of poultry products sold. During the first nine months of fiscal 2020, the Company sold 3,553.4 million pounds of poultry products, up from 3,265.7 million pounds during the first nine months of fiscal 2019. The increase in pounds of poultry products sold was primarily attributable to the ramp up in production at the new Tyler, Texas processing facility. The new facility processed approximately 44.5 million head during the first nine months of fiscal 2020, or approximately 9.1% of the total head processed by the Company during the period, and sold approximately 281.8 million pounds of poultry products during the first nine months of fiscal 2020, or approximately 7.9% of the total poultry pounds sold by the Company during the period. By comparison, the Tyler, Texas facility processed approximately 10.7 million head during the first nine months of fiscal 2019, or approximately 2.4% of the total head processed by the Company during the period, and sold approximately 73.6 million pounds of poultry products during the first nine months of fiscal 2019, or approximately 2.3% of the total poultry pounds sold by the Company during the period.
Overall, market prices for poultry products decreased during the first nine months of fiscal 2020 as compared to the same period of fiscal 2019. When compared to the first nine months of fiscal 2019, Urner Barry average market prices for tenders, leg quarters, boneless thigh meat, jumbo wings and boneless breast meat decreased by 22.6%, 12.9%, 12.5%, 11.9% and 6.4%, respectively. Average realized prices for chicken products sold to retail grocery store customers increased by 0.9% during the first nine months of fiscal 2020 as compared to the same period of fiscal 2019 and continue to reflect strong demand.
Net sales of prepared chicken products for the nine months ended July 31, 2020 and 2019 were $143.2 million and $188.2 million, respectively, representing a decrease of 23.9%. This decrease is primarily attributable to a 24.3% decrease in the pounds of prepared chicken products sold, while the average sales price of prepared chicken products sold increased by 0.5%. During the first nine months of fiscal 2020, the Company sold 75.9 million pounds of prepared chicken products, down from 100.2 million pounds during the first nine months of fiscal 2019. The decrease in pounds of prepared chicken products sold resulted from the decrease in demand from our food service customers due to the COVID-19 pandemic, as described above.
Cost of sales for the third quarter of fiscal 2020 was $866.0 million as compared to $824.1 million during the third quarter of fiscal 2019, an increase of $41.9 million, or 5.1%. Cost of sales of poultry products during the third quarter of fiscal 2020, as compared to the third quarter of fiscal 2019, was $815.9 million and $759.1 million, respectively, which represents a 1.1% increase in the average cost of sales per pound of poultry products. As illustrated in the table below, which for comparative purposes includes poultry products transferred to the Company's prepared chicken plant, the increase in the cost of sales per pound of poultry products resulted from a $0.0214 per pound, or 5.2%, increase in other costs of sales of poultry products, partially offset by a decrease in the cost of feed per pound of broilers processed of $0.0142, or 5.6%.









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Poultry Cost of Sales
(In thousands, except per pound data)
  Three Months Ended 
 July 31, 2020
Three Months Ended 
 July 31, 2019
Incr/(Decr)
Description Dollars Per lb. Dollars Per lb. Dollars Per lb.
Beginning Inventory $ 37,969  $ 0.4129  $ 33,327  $ 0.4259  $ 4,642  $ (0.0130)
Feed in broilers processed 294,556  0.2404  302,038  0.2546  (7,482) (0.0142)
All other cost of sales 531,593  0.4338  489,214  0.4124  42,379  0.0214 
Less: Ending Inventory 32,922  0.4065  43,300  0.4514  (10,378) (0.0449)
Total poultry cost of sales $ 831,196 
(1)
$ 0.6723  $ 781,279 
(1)
$ 0.6686  $ 49,917  $ 0.0037 
Pounds:
Beginning Inventory 91,968  78,247 
Poultry processed/other 1,225,452  1,186,226 
Poultry sold 1,236,431 
(1)
1,168,543 
(1)
Ending Inventory 80,989  95,930 
Note (1) - For comparative purposes, includes the costs and pounds of product sold to the Company's prepared chicken plant.
Other costs of sales of poultry products consists primarily of labor, packaging, freight, maintenance and repairs, utilities, antimicrobial interventions, contract grower pay, chick costs and certain fixed costs. These non-feed related costs of poultry products sold increased by $0.0214 per pound processed, or 5.2%, during this year’s third fiscal quarter compared to the same quarter a year ago. This increase is primarily attributable to higher labor, packaging and certain fixed costs, as well as expenses incurred in response to the COVID-19 pandemic. The COVID-19 related expenses included in other costs of sales during the three months ended July 31, 2020, total approximately $11.4 million and include payroll expenses for employees who are quarantined, payroll expenses for attendance bonuses paid to hourly employees, and expenses related to various items and services including personal protective equipment, thermometers, barriers and other social-distancing measures and additional nursing staff to protect the health and safety of our employees. Excluding the COVID-19 related expenses, other costs of sales increased by $0.0121 per pound processed, or 2.9%.
Cost of sales of the Company’s prepared chicken products during the third quarter of fiscal 2020 were $50.1 million as compared to $65.0 million during the same quarter a year ago, a decrease of $14.9 million, or 23.0%. This decrease was primarily attributable to a 21.5% decrease in the pounds of prepared chicken sold, which is the result of reduced demand for prepared chicken products from our food service customers due to the COVID-19 pandemic.
Cost of sales for the first nine months of fiscal 2020 was $2,521.8 million, as compared to $2,273.4 million during the first nine months of fiscal 2019, an increase of $248.4 million, or 10.9%. Cost of sales of poultry products during the first nine months of fiscal 2020, as compared to the first nine months of fiscal 2019, was $2,386.9 million and $2,100.2 million, respectively, which represents a 4.4% increase in the average cost of sales per pound of poultry products. As illustrated in the table below, which for comparative purposes includes poultry products sold to the Company's prepared chicken plant, the increase in the cost of sales per pound of poultry products resulted from a $0.0225 per pound, or 5.6%, increase in other costs of sales of poultry products and a decrease in the cost of feed per pound of broilers processed of $0.0009, or 0.4%.








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Poultry Cost of Sales
(In thousands, except per pound data)
  Nine Months Ended 
 July 31, 2020
Nine Months Ended 
 July 31, 2019
Incr/(Decr)
Description Dollars Per lb. Dollars Per lb. Dollars Per lb.
Beginning Inventory $ 35,121  $ 0.3868  $ 30,973  $ 0.3686  $ 4,148  $ 0.0182 
Feed in broilers processed 895,804  0.2503  838,300  0.2512  57,504  (0.0009)
All other cost of sales 1,526,030  0.4264  1,348,153  0.4039  177,877  0.0225 
Reversal of prior-period inventory write-down (2,800) (0.0008) (9,600) (0.0029) 6,800  0.0021 
Less: Ending Inventory 32,922  0.4065  43,300  0.4514  (10,378) (0.0449)
Total poultry cost of sales $ 2,421,233 
(1)
$ 0.6747  $ 2,164,526 
(1)
$ 0.6509  $ 256,707  $ 0.0238 
Pounds:
Beginning Inventory 90,805  84,020 
Poultry processed/other 3,578,766  3,337,454 
Poultry sold 3,588,582 
(1)
3,325,544 
(1)
Ending Inventory 80,989  95,930 
Note (1) - For comparative purposes, includes the costs and pounds of product sold to the Company's prepared chicken plant.
Other costs of sales of poultry products consists primarily of labor, packaging, freight, maintenance and repairs, utilities, antimicrobial interventions, contract grower pay, chick costs and certain fixed costs. These non-feed related costs of poultry products sold increased by $0.0225 per pound processed, or 5.6%, during the first nine months of fiscal 2020, as compared to the same period a year ago. Part of this increase is attributable to inefficiencies at the Company's new Tyler, Texas facilities, which began initial operations during the last month of the first quarter of fiscal 2019. A new facility's other costs of sales per pound processed will be higher compared to similar complexes until the new complex reaches full capacity. Excluding the Tyler facilities, other costs of sales would have increased by $0.0192 per pound processed, or 4.9%. This increase is primarily attributable to higher labor and certain fixed costs, as well as expenses incurred in response to the COVID-19 pandemic, and is partially offset by lower freight costs. The COVID-19 related expenses included in other costs of sales during the nine months ended July 31, 2020, total approximately $16.2 million, and include payroll expenses for employees who are quarantined, payroll expenses for attendance bonuses paid to hourly employees, and expenses related to various items and services including personal protective equipment, thermometers, barriers and other social-distancing measures and additional nursing staff to protect the health and safety of our employees. Excluding the COVID-19 related expenses not attributable to our Tyler facilities, other costs of sales, excluding Tyler facilities, increased by $0.0148 per pound processed, or 3.7%.
Cost of sales of the Company’s prepared chicken products during the first nine months of fiscal 2020 were $134.9 million as compared to $173.2 million during the same period of fiscal 2019, a decrease of $38.2 million, or 22.1%. This decrease was primarily attributable to a 24.3% decrease in the pounds of prepared chicken sold, which is the result of reduced demand for prepared chicken products from our food service customers due to the COVID-19 pandemic.
The Company recorded the value of live broiler inventories on hand at July 31, 2020 at cost. When market conditions are favorable, the Company values the broiler inventories on hand at cost, and accumulates costs as the birds are grown to a marketable age subsequent to the balance sheet date. In periods where the Company estimates that the cost to grow live birds in inventory to a marketable age, process, and distribute those birds will be higher in the aggregate than the anticipated sales price, the Company will make an adjustment to lower the value of live birds in inventory to the net realizable value. No such charge was required at July 31, 2020 or July 31, 2019.
Selling, general and administrative ("SG&A") costs during the third quarter of fiscal 2020 were $50.6 million, a decrease of $1.6 million compared to the $52.2 million during the third quarter of fiscal 2019. SG&A costs during the nine months ended July 31, 2020 were $156.3 million, a decrease of $3.7 million compared to the $160.0 million during the nine months ended July 31, 2019. The following tables include the components of SG&A costs for the three and nine months ended July 31, 2020 and 2019.


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Selling, General and Administrative Costs
(in thousands)
Description Three Months Ended 
 July 31, 2020
Three Months Ended 
 July 31, 2019
Increase/(Decrease)
ESOP expense $   $ 2,700  $ (2,700)
Stock compensation expense 2,091  3,608  (1,517)
Trainee expense 2,857  3,796  (939)
Advertising expense 3,004  3,695  (691)
Sanderson Farms Championship expense 2,034  1,947  87 
Legal expense 6,054  5,463  591 
Broker commissions 3,647  2,852  795 
Administrative salaries 12,238  11,341  897 
COVID-19-related expense 4,550    4,550 
All other SG&A 14,115  16,824  (2,709)
Total SG&A $ 50,590  $ 52,226  $ (1,636)
Regarding the table above, the decrease in ESOP expense, payout of which is based on profitability, is the result of probable earnings for fiscal 2020 being less than fiscal 2019 earnings. The decrease in stock compensation expense is primarily the result of lower accruals related to the outstanding performance share agreements described in "Part I, Item 1, Note 5 - Stock Compensation Plans" of this Form 10-Q. The increase in COVID-19-related expense is the result of direct expenses for items and services related to the health, safety and welfare of our employees during the COVID-19 pandemic. The decrease in all other SG&A expenses is primarily the result of lower levels of travel and entertainment expenses as a result of the COVID-19 pandemic.
Selling, General and Administrative Costs
(in thousands)
Description Nine Months Ended 
 July 31, 2020
Nine Months Ended 
 July 31, 2019
Increase/(Decrease)
Start-up expense (Tyler, Texas) $   $ 9,361  $ (9,361)
Trainee expense 9,278  12,889  (3,611)
ESOP expense   2,700  (2,700)
Stock compensation expense 6,789  9,102  (2,313)
Advertising expense 9,504  10,176  (672)
Sanderson Farms Championship expense 6,132  5,975  157 
Broker commissions 9,423  8,108  1,315 
Administrative salaries 36,056  33,826  2,230 
Legal expense 19,993  17,167  2,826 
COVID-19-related expense 8,049    8,049 
All other SG&A 51,065  50,687  378 
Total SG&A $ 156,289  $ 159,991  $ (3,702)
Regarding the table above, the change in start-up expense in any particular period relates to the stage of the start-up process in which a facility under construction is in during the period. Non-construction related expenses, such as labor, training and office-related expenses for a facility under construction are recorded as start-up expense until the facility begins operations. As a facility moves closer to start-up, the expenses incurred for labor, training, etc. increase. As a result, amounts classified as start-up expenses will increase period over period until the facility begins production. Once production begins, the expenses from that point forward are recorded as costs of goods sold. The decrease in trainee expense is primarily the result of a reduction in the number of trainee positions filled. The decrease in ESOP expense, payout of which is based on profitability, is the result of probable earnings for fiscal 2020 being less than fiscal 2019 earnings. The decrease in stock compensation expense is primarily the result of lower accruals related to the outstanding performance share agreements described in "Part I, Item 1, Note 5 - Stock Compensation Plans" of this Form 10-Q. The increase in legal expense is primarily attributable to our ongoing defense of the litigation described in "Part II, Item 1. Legal Proceedings" of this Form 10-Q. The increase in COVID-19-related
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expense is the result of direct expenses for items and services related to the health, safety and welfare of our employees during the COVID-19 pandemic.
The Company’s operating income for the three months ended July 31, 2020 was $39.9 million and its operating loss for the nine months ended July 31, 2020 was $53.8 million, as compared to operating income for the three and nine months ended July 31, 2019 of $68.8 million and $100.4 million, respectively. The decrease in operating income for the periods ended July 31, 2020, as compared to the same periods a year ago, resulted from lower average selling prices and higher average costs of goods sold, primarily attributable to the COVID-19 pandemic.
The Company recognized interest income of $0.5 million during the third quarter and first nine months of fiscal 2020, as compared to no interest income during the same periods of fiscal 2019. Interest expense during the third quarter and first nine months of fiscal 2020 was $1.5 million and $4.5 million, respectively, as compared to $1.5 million and $3.2 million, respectively, during the third quarter and first nine months of fiscal 2019. The increase in interest expense during the first nine months of fiscal 2020, as compared to the same period a year ago, is the result of the Company's higher outstanding debt levels during fiscal 2020, partially offset by lower interest rates.
The Company’s effective tax rates for the three and nine months ended July 31, 2020 were 15.5% and 100.6%, respectively, as compared to estimated annual effective tax rates of 20.7% and 21.7%, respectively, for the three and nine months ended July 31, 2019. During the nine months ended July 31, 2020, we recorded a net discrete income tax benefit of approximately $38.1 million related to the carry-back provisions allowed by the CARES Act, in addition to other smaller discrete items. Excluding the effects of discrete items recognized during the periods, primarily related to the CARES Act, the Company's effective tax rates for the three and nine months ended July 31, 2020 would have been approximately 18.2% and 32.7%, respectively, as compared to estimated annual effective tax rates of 24.9% and 24.2%, respectively, for the three and nine months ended July 31, 2019. Normally during interim periods, the Company has estimated its annual effective tax rate for the full fiscal year to use when recording the interim period tax provision. Given significant volatility in the poultry markets as a result of the COVID-19 pandemic, as well as factors related to the carry-back provisions of the CARES Act, the Company is not able to reliably estimate its annual effective tax rate for the interim period ending July 31, 2020. Therefore, the income tax provision for the third quarter and first nine months of fiscal 2020 was made using the actual effective tax rate for the nine-month period ending July 31, 2020.
As of July 31, 2020, the Company's deferred income tax liability was $135.3 million as compared to $74.1 million at October 31, 2019, an increase of $61.2 million. This increase is primarily attributable to the carry-back provisions discussed above, as well as bonus depreciation taken on qualifying assets placed in service during fiscal 2020.
During the three and nine months ended July 31, 2020, the Company’s net income was $32.8 million, or $1.48 per share, and $0.4 million, or $0.02 per share, respectively. For the three and nine months ended July 31, 2019, the Company’s net income was $53.4 million, or $2.41 per share, and $76.2 million, or $3.44 per share, respectively. The decrease in net income for the third quarter and first nine months of fiscal 2020 as compared to the same periods in fiscal 2019 is primarily attributable to lower average selling prices and higher average costs of goods sold, partially offset by the income tax benefits recognized as a result of the CARES Act. Details related to each of the aforementioned drivers of the changes in net income have been discussed above.
Liquidity and Capital Resources
The Company’s working capital, calculated by subtracting current liabilities from current assets, at July 31, 2020 was $391.2 million, and its current ratio, calculated by dividing current assets by current liabilities, was 2.8 to 1. The Company’s working capital and current ratio at October 31, 2019 were $365.4 million and 2.7 to 1, respectively. These measures reflect the Company’s ability to meet its short term obligations and are included here as a measure of the Company’s short term market liquidity. The Company’s principal sources of liquidity during fiscal 2020 include cash on hand at October 31, 2019, funds available under the Company’s revolving credit facility, and an approximately $84.4 million income tax refund, resulting from the carry-back provision allowed by the CARES Act, received during the third quarter. As described below, the Company is a party to a revolving credit facility dated March 21, 2019, with a maximum available borrowing capacity of $1.0 billion. As of July 31, 2020 and August 26, 2020, the Company had borrowed $95.0 million under the facility, and had approximately $19.8 million outstanding in letters of credit, leaving $885.2 million of borrowing capacity available under the facility. Management believes the Company has sufficient liquidity available to meet its needs.
The Company’s cash position at July 31, 2020 and October 31, 2019 consisted of $66.1 million and $95.4 million, respectively, in cash and short-term cash investments. The Company’s ability to invest cash is limited by covenants in its revolving credit agreement to short-term investments. All of the Company’s cash at July 31, 2020 and October 31, 2019 was
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held in bank accounts and highly-liquid investment accounts. There were no restrictions on the Company’s access to its cash, and such cash was available to the Company on demand to fund its operations.
Cash flows provided by operating activities during the nine months ended July 31, 2020 totaled $115.7 million, as compared to cash flows provided by operating activities of $152.1 million during the nine months ended July 31, 2019. Cash flows from operating activities decreased by $36.4 million, resulting from two primary factors. During the first nine months of fiscal 2020, the Company realized lower margins due to a decrease in average selling prices and an increase in average costs of goods sold, as compared to the first nine months of fiscal 2019. The decrease caused by the lower realized margins was partially offset by the change in cash received related to income taxes. During the first nine months of fiscal 2020, the Company's net cash received related to income taxes totaled approximately $82.9 million, as compared to approximately $25.7 million in net cash received related to income taxes during the first nine months of fiscal 2019.
Cash flows used in investing activities during the first nine months of fiscal 2020 and 2019 were $165.7 million and $209.3 million, respectively. The Company’s capital expenditures during the first nine months of fiscal 2020 were approximately $166.0 million, and included approximately $46.2 million for multiple large-scale equipment and building upgrades at multiple complexes and $9.7 million to purchase new vehicles that in previous years would have been leased. These vehicles primarily consist of semi-tractors and trailers that are used to haul the Company's live birds and feed. Capital expenditures for the first nine months of fiscal 2019 were $210.9 million, and included approximately $62.7 million related to construction at the Tyler, Texas complex, and approximately $9.4 million related to final payments made under purchase agreements for delivery of new aircraft.
Cash flows provided by financing activities during the nine months ended July 31, 2020 totaled $20.6 million, as compared to cash flows provided by financing activities of $10.3 million during the nine months ended July 31, 2019. The change in cash flows from financing activities is primarily attributable to the increase in net borrowings under the Company's revolving credit facility. During the nine months ended July 31, 2020, the Company's net borrowings under the facility totaled $40.0 million as compared to net borrowings of $30.0 million under the facility during the nine months ended July 31, 2019.
As of August 21, 2020, the Company estimates its capital budget for fiscal 2020, excluding operating leases, will be approximately $225.1 million. The Company expects the 2020 capital budget to be funded by internally generated working capital, cash flows from operations and funds available under the Company's revolving credit facility. Included in the approximately $225.1 million capital budget is an aggregate of approximately $52.7 million for multiple large-scale equipment and building upgrades at multiple complexes, approximately $15.0 million for construction of a new hatchery to replace the hatchery currently in service in Laurel, Mississippi, and approximately $11.5 million to purchase new vehicles that in previous years would have been leased. These vehicles primarily consist of semi-tractors and trailers that are used to haul the Company's live birds and feed. Excluding the budgeted amounts for the items detailed above, the fiscal 2020 capital budget is estimated to be approximately $145.9 million. These amounts are estimates and are subject to change as we move through the remainder of fiscal 2020.
In March 2017, the Company announced the selection of sites in Lindale, Mineola and Smith County, Texas, for the construction of a new poultry processing complex. The completed complex consists of a hatchery, feed mill, processing plant and waste water treatment facility with the capacity to process 1.3 million chickens per week. The initial phase of operations of the new complex began during the first quarter of fiscal 2019, and the complex is now operating at near full capacity.
On October 2, 2017, the Company filed a shelf registration statement on Form S-3 to register for possible future sale shares of the Company's common and/or preferred stock. An indeterminate amount of common stock and preferred stock may be offered by the Company in amounts, at prices and on terms to be determined by the board of directors if and when shares are issued. The registration statement became automatically effective upon filing with the SEC on October 2, 2017.
The Company regularly evaluates both internal and external growth opportunities, including acquisition opportunities and the possible construction of new production assets, and conducts due diligence activities in connection with such opportunities. The cost and terms of any financing to be raised in conjunction with any growth opportunity, including the Company’s ability to raise debt or equity capital on terms and at costs satisfactory to the Company, and the effect of such opportunities on the Company’s balance sheet, are critical considerations in any such evaluation.
Revolving Credit Facility
The Company is a party to a revolving credit facility dated March 21, 2019, with a maximum available borrowing capacity of $1.0 billion. Under the credit facility, the Company may not exceed a maximum debt to total capitalization ratio of 50%. The Company has a one-time right, at any time during the term of the agreement, to increase the maximum debt to total
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capitalization ratio then in effect by five percentage points in connection with the construction of a new poultry complex for the four fiscal quarters beginning on the first day of the fiscal quarter during which the Company gives written notice of its intent to exercise this right. The Company has not exercised this right. The facility also sets a minimum net worth requirement that at July 31, 2020, was $1,014.9 million. The credit is unsecured and, unless extended, will expire on March 21, 2024. As of July 31, 2020 and August 26, 2020, the Company had borrowed $95.0 million under the facility, and had approximately $19.8 million outstanding in letters of credit, leaving $885.2 million of borrowing capacity available under the facility. For more information about the facility, see Item 1.01 of our Current Report on Form 8-K filed March 27, 2019.

Critical Accounting Estimates
We consider accounting policies related to allowance for doubtful accounts, inventories, long-lived assets, accrued self-insurance, performance share plans, income taxes and contingencies to be critical accounting estimates. These policies are summarized in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended October 31, 2019.

New Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, Leases. The guidance is intended to increase transparency and comparability among companies by requiring an entity that is a lessee to recognize on the balance sheet the right-of-use assets and lease liabilities arising from all leases with terms, as defined by the guidance, of greater than twelve months. The guidance also requires disclosure of key information about leasing arrangements. The Company adopted this guidance during the first quarter of fiscal 2020, and we used the transition method that requires a cumulative-effect adjustment to the beginning balance of retained earnings during the period of adoption, rather than restating prior-period financial statements; however no such cumulative-effect adjustment was required under our circumstances. This guidance also provides certain practical expedients, including a practical expedient package during transition. We elected to use this package, which allowed the Company to carry forward its determination of whether a lease exists, the classification of a lease, and whether initial direct lease costs exist for purposes of transition to the new standard. We did not utilize the hindsight practical expedient. As of July 31, 2020, we recognized right-of-use assets and lease liabilities of approximately $42.5 million, primarily related to transportation equipment. Adoption did not have a material effect on our consolidated statements of operations and cash flows. For further information regarding the Company's leases, refer to Part I, Item 1, Notes to Condensed Consolidated Financial Statements, Note 11 - Leases.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, our fiscal 2021. Early adoption is permitted. We do not expect adoption to have a material effect on our consolidated financial statements.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is a purchaser of certain commodities, primarily corn and soybean meal, for use in manufacturing feed for its chickens. As a result, the Company’s earnings are affected by changes in the price and availability of such feed ingredients. Feed grains are subject to volatile price changes caused by factors described below that include weather, size of harvest, transportation and storage costs and the agricultural policies of the United States and foreign governments. The price fluctuations of feed grains have a direct and material effect on the Company’s profitability.
Generally, the Company commits to purchase feed ingredients for deferred delivery from one month to nine months after the time of the commitment. The grain purchases are made directly with our usual grain suppliers, which are companies in the business of regularly supplying grain to end users, and do not involve options to purchase. Such purchases occur when our chief operating decision maker concludes that market factors indicate that prices at the time the grain is needed are likely to be higher than current prices, or where, based on current and expected market prices for the Company’s poultry products, our chief operating decision maker believes the Company can purchase feed ingredients at prices that will allow the Company to earn a reasonable return for its shareholders. The Company sometimes purchases its feed ingredients for prompt delivery to its feed mills at market prices at the time of such purchases. Market factors considered by our chief operating decision maker in determining whether or not and to what extent to commit to buy grain for deferred delivery include:
Current market prices;
Current and predicted weather patterns in the United States, South America, China and other grain producing areas, as such weather patterns might affect the planting, growing, harvesting and yield of feed grains;
The expected size of the harvest of feed grains in the United States and other grain producing areas of the world as reported by governmental and private sources;
Current and expected changes to the agricultural policies of the United States and foreign governments;
The relative strength of United States currency and expected changes therein as it might affect the ability of foreign countries to buy United States feed grain commodities;
The current and expected volumes of export of feed grain commodities as reported by governmental and private sources;
The current and expected use of available feed grains for uses other than as livestock feed grains (such as the use of corn for the production of ethanol, which use is affected by the price of crude oil); and
Current and expected market prices for the Company’s poultry products.
The Company purchases physical grain, not financial instruments such as puts, calls or straddles that derive their value from the value of physical grain. Thus, the Company does not use derivative financial instruments as defined in ASC 815, “Accounting for Derivatives for Instruments and Hedging Activities,” or any market risk sensitive instruments of the type contemplated by Item 305 of Regulation S-K. The Company does not enter into any derivative transactions or purchase any grain-related contracts other than the physical grain contracts described above.
Although the Company does not use derivative financial instruments as defined in ASC 815 or purchase market risk sensitive instruments of the type contemplated by Item 305 of Regulation S-K, the commodities that the Company does purchase for physical delivery, primarily corn and soybean meal, are subject to price fluctuations that have a direct and material effect on the Company’s profitability as mentioned above. During the third quarter of fiscal 2020, the Company purchased approximately 33.0 million bushels of corn and approximately 307,804 tons of soybean meal for use in manufacturing feed for its live chickens. A $1.00 change in the average market price paid per bushel for corn would have affected the Company’s cash outlays for corn by approximately $33.0 million in the third quarter of fiscal 2020. Likewise, a $10.00 change in the price paid per ton for soybean meal would affect the Company’s cash outlays by approximately $3.1 million.
Although changes in the market price paid for feed grains affect cash outlays at the time the Company purchases the grain, such changes do not immediately affect cost of sales. The cost of feed grains is recognized in cost of sales, on a first-in-first-out basis, at the same time that the sales of the chickens that consume the feed grains are recognized. Thus, there is a lag between the time cash is paid for feed ingredients and the time the cost of such feed ingredients is reported in cost of goods sold. For example, corn delivered to a feedmill and paid for one week might be used to manufacture feed the following week. However, the chickens that eat that feed might not be processed and sold for another 48-62 days, and only at that time will the costs of the feed consumed by the chicken become included in cost of goods sold.
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During the third quarter of fiscal 2020, the Company’s average feed cost per pound of broilers processed totaled $0.2404 per pound. Feed costs per pound of broilers processed consist primarily of feed grains, but also include other feed ingredients such as vitamins, fat and mineral feed supplements. The average feed cost per pound is influenced not only by the price of feed ingredients, but also by the efficiency with which live chickens convert feed into body weight. Factors such as weather, poultry husbandry, quality of feed ingredients and the quality, size and health of the bird, among others, affect the quantity of feed necessary to mature chickens to the target live weight and the efficiency of that process. Generally, however, a $1.00 change in the average price paid per bushel of corn fed to a chicken during its life would have affected average feed cost per pound of broilers processed by $0.0269, based on the quantity of grain used during the third quarter of fiscal 2020. Similarly, a $10.00 change in the average price paid per ton of soybean meal would have influenced the average feed cost per pound of broilers processed by $0.0025 during the third quarter of fiscal 2020.
The following table shows the impact of hypothetical changes in the price of corn and soybean meal on both the Company’s cash flow and cost of goods sold, based on quantities actually purchased in the third quarter of fiscal 2020:
Feed Ingredient Quantity Purchased
during the Third
Fiscal Quarter of
2020
Hypothetical Price
Change
Impact on Cash
Outlay
Ultimate Impact on
Feed Cost per
Pound of broilers
Processed
Corn 33.0 million bushels $1.00 per bushel $33.0 million $0.0269/lb processed
Soybean meal 307,804 tons $10.00 per ton $3.1 million $0.0025/lb processed
The Company’s interest expense is sensitive to changes in the general level of interest rates in the United States, and when the Company is indebted, it typically maintains certain of its debt as fixed rate in nature to mitigate the impact of fluctuations in interest rates. At July 31, 2020 the Company had no fixed-rate debt on its balance sheet; however, management believes the potential effects of near-term changes in interest rates on the Company's debt are not material.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of July 31, 2020, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of July 31, 2020.
There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended July 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Between September 2, 2016 and October 13, 2016, Sanderson Farms, Inc. and our subsidiaries were named as defendants, along with 13 other poultry producers and certain of their affiliated companies, in multiple putative class action lawsuits filed by direct and indirect purchasers of broiler chickens in the United States District Court for the Northern District of Illinois. The complaints allege that the defendants conspired to unlawfully fix, raise, maintain, and stabilize the price of broiler chickens, thereby violating federal and certain states’ antitrust laws, and also allege certain related state-law claims. The complaints also allege that the defendants fraudulently concealed the alleged anticompetitive conduct in furtherance of the conspiracy. The complaints seek damages, including treble damages for the antitrust claims, injunctive relief, costs, and attorneys’ fees. As detailed below, the Court has consolidated all of the direct purchaser complaints into one case, and the indirect purchaser complaints into two cases, one on behalf of commercial and institutional indirect purchaser plaintiffs and one on behalf of end-user consumer plaintiffs. The cases are part of a coordinated proceeding captioned In re Broiler Chicken Antitrust Litigation.
On October 28, 2016, the direct and indirect purchaser plaintiffs filed consolidated, amended complaints, and on November 23, 2016, the direct and indirect purchaser plaintiffs filed second amended complaints. On December 16, 2016, the indirect
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purchaser plaintiffs separated into two cases. On that date, the commercial and institutional indirect purchaser plaintiffs filed a third amended complaint, and the end-user consumer plaintiffs filed an amended complaint.
On January 27, 2017, the defendants filed motions to dismiss the amended complaints in all of the cases, and on November 20, 2017, the motions to dismiss were denied. On February 7, 2018, the direct purchaser plaintiffs filed their third amended complaint, adding three additional poultry producers as defendants. On February 12, 2018, the end-user consumer plaintiffs filed their second amended complaint, in which they also added three additional poultry producers as defendants, along with Agri Stats, Inc. On February 20, 2018, the commercial and institutional indirect purchaser plaintiffs filed their fourth amended complaint. On November 13, 2018, the commercial and institutional indirect purchaser plaintiffs filed their fifth amended complaint, adding three additional poultry producers as defendants. On November 28, 2018, the end-user consumer plaintiffs filed their third amended complaint. On January 15, 2019, the direct purchaser plaintiffs filed their fourth amended complaint, and the commercial and institutional indirect purchaser plaintiffs filed their sixth amended complaint. Both the direct purchaser plaintiffs and the commercial and institutional indirect purchaser plaintiffs added two new poultry producers as defendants, as well as Agri Stats, Inc. On August 6, 2020, the end-user consumer plaintiffs filed a motion for leave to file a fifth amended complaint. Defendants' opposition is due August 28, 2020, and end-user consumer plaintiffs' reply is due September 11, 2020. The parties are currently engaged in discovery.
Between December 8, 2017 and June 12, 2020, additional purported direct-purchaser entities individually brought forty separate suits against 20 poultry producers, including Sanderson Farms and Agri Stats, Inc., in the United States District Court for the Northern District of Illinois, the United States District Court for the District of Kansas, the United States District Court for the Western District of Arkansas, and the United States District Court for the District of Puerto Rico. These suits allege substantially similar claims to the direct purchaser class complaint described above; certain of the suits additionally allege related state-law and common law claims, and related claims under federal and Georgia RICO statutes. Four complaints filed on June 12, 2020 and another complaint amended on July 24, 2020, also plead allegations of federal bid rigging. Those suits filed in the Northern District of Illinois are now pending in front of the same judge as the putative class action lawsuits. On June 26, 2018, the defendants filed a motion to transfer the case filed in the District of Kansas to the Northern District of Illinois, and that motion was granted on September 13, 2018. On June 7, 2019, the plaintiffs filed a motion to transfer the case filed in the Western District of Arkansas to the Northern District of Illinois, and that motion was granted on June 11, 2019. On July 24, 2019, one of the defendants filed a motion to transfer the case filed in the District of Puerto Rico to the Northern District of Illinois, and that motion was granted on July 25, 2019. On July 22, 2019, the Company moved to dismiss in part those direct-purchaser complaints that allege claims under federal and Georgia RICO statutes against it. The motion was fully briefed on September 20, 2019, and the Court heard argument on the motion on December 18, 2019. On March 3, 2020, the Court denied the Company's motion. On October 18, 2019, defendants moved to dismiss the case filed by the Commonwealth of Puerto Rico on its behalf and on behalf of its citizens. The motion was fully briefed on January 21, 2020. On July 15, 2020, the Court dismissed Puerto Rico's claims on behalf of its citizens. On July 2, 2020 and August 6, 2020, certain defendants, including the Company, moved to exclude bid rigging allegations and claims from the consolidated In re Broiler Chicken Antitrust Litigation. Plaintiffs filed oppositions on August 6, 2020 and August 20, 2020, and defendants filed a reply on August 20, 2020. Defendants' further reply is due on September 3, 2020. The parties are currently engaged in discovery, subject to the COVID-19-related delays discussed below. It is possible additional individual actions may be filed.
The Company is aware that certain plaintiffs’ counsel in In re Broiler Chicken Antitrust Litigation received from the United States Department of Justice, Antitrust Division, a subpoena that included a request to produce all discovery in the case to a grand jury. On June 27, 2019, the Court in In re Broiler Chicken Antitrust Litigation permitted the United States Department of Justice to intervene in the case, as well as ordered certain discovery stayed until September 27, 2019. Before the discovery stay expired on September 27, 2019, the United States Department of Justice asked the Court in In re Broiler Chicken Antitrust Litigation to extend the discovery stay for an additional six months. On September 25, 2019, the Court granted the additional stay of not less than three months. On October 16, 2019, after further consideration, the Court extended the stay until June 27, 2020. On December 18, 2019, the Court after further consideration ordered that the stay be lifted on March 31, 2020.
The Company received a grand jury subpoena in connection with the United States Department of Justice Antitrust Division investigation on September 9, 2019. The Company is complying with the subpoena and providing documents and information as requested by the Department of Justice in connection with its investigation.
Since March 16, 2020, given the current COVID-19 public health emergency, the Northern District of Illinois issued three orders extending all deadlines in civil cases by 21 days, 28 days and 28 days, respectively, and two orders that did not extend any deadlines, but explained other court procedures to protect the public health and welfare. These orders apply to the litigation described above. The Northern District of Illinois will vacate, amend or extend the Fourth Amended General Order on or before September 14, 2020.
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We intend to continue to defend the lawsuits vigorously; however, the Company cannot predict the outcome of these actions. If the plaintiffs were to prevail or the Department of Justice were to pursue charges, the Company could be liable for damages or other sanctions, which could have a material, adverse effect on our financial position and results of operations.
On January 30, 2017, the Company received a letter from an attorney representing a putative shareholder demanding that the Company take action against current and/or former officers and directors of the Company for alleged breach of their fiduciary duties. The shareholder asserted that the officers and directors (i) failed to take any action to stop the alleged antitrust conspiracy described above, despite their alleged knowledge of the conspiracy, and (ii) made and/or caused the Company to make materially false and misleading statements by failing to disclose the alleged conspiracy. The shareholder also asserted that certain directors engaged in “insider sales” from which they improperly benefited. In addition to demanding that the officers and directors be sued, the shareholder also demanded that the Company adopt unspecified corporate governance improvements. On February 9, 2017, pursuant to statutory procedures available in connection with demands of this type, the Company’s board of directors appointed a special committee of qualified directors to determine, after conducting a reasonable inquiry, whether it was in the Company’s best interests to pursue any of the actions demanded in the shareholder’s letter. On April 26, 2017, the special committee reported to the Company’s board of directors its determination that it was not in the Company’s best interests to take any of the demanded actions at that time, and that no governance improvements related to the subject matter of the demand were needed. On May 5, 2017, the special committee’s counsel informed the shareholder’s counsel of the committee’s determination. As of the date of filing of this report, and to the Company’s knowledge, no legal proceedings related to the shareholder’s demand have been filed. However, we are voluntarily disclosing the existence of the shareholder demand for the sake of completeness, in light of its relationship to the putative antitrust class action lawsuits described above.
On January 27, 2017, Sanderson Farms, Inc. and our subsidiaries were named as defendants, along with four other poultry producers and certain of their affiliated companies, in a putative class action lawsuit filed in the United States District Court for the Eastern District of Oklahoma. On March 27, 2017, Sanderson Farms, Inc. and our subsidiaries were named as defendants, along with four other poultry producers and certain of their affiliated companies, in a second putative class action lawsuit filed in the United States District Court for the Eastern District of Oklahoma. The Court ordered the suits consolidated into one proceeding, and on July 10, 2017, the plaintiffs filed a consolidated amended complaint. The consolidated amended complaint alleges that the defendants unlawfully conspired by sharing data on compensation paid to broiler farmers, with the purpose and effect of suppressing the farmers’ compensation below competitive levels. The consolidated amended complaint also alleges that the defendants unlawfully conspired to not solicit or hire the broiler farmers who were providing services to other defendants. The consolidated amended complaint seeks treble damages, costs and attorneys’ fees. On September 8, 2017, the defendants filed a motion to dismiss the amended complaint, on October 23, 2017, the plaintiffs filed their response, and on November 22, 2017, the defendants filed a reply. On January 19, 2018, the Court granted the Sanderson Farms defendants’ motion to dismiss for lack of personal jurisdiction.
On February 21, 2018, the plaintiffs filed a substantially similar lawsuit in the United States District Court for the Eastern District of North Carolina against Sanderson Farms and our subsidiaries and another poultry producer. The plaintiffs subsequently moved to consolidate this action with the Eastern District of Oklahoma action in the Eastern District of Oklahoma for pre-trial proceedings, with the defendants in support thereof. That motion was denied. On July 13, 2018, the defendants moved to dismiss the lawsuit in the Eastern District of North Carolina, and briefing was completed on September 4, 2018. On January 15, 2019, the Court granted in part the defendants’ motion to dismiss and stayed the action in the Eastern District of North Carolina pending resolution of the action in the Eastern District of Oklahoma. On January 6, 2020, the Court in the Eastern District of Oklahoma denied defendants’ motion to dismiss. On January 27, 2020, plaintiffs in the Oklahoma case moved for leave to amend their complaint. The Court in the Eastern District of Oklahoma granted the plaintiffs' motion, and the plaintiffs filed a consolidated amended complaint on February 21, 2020. The Oklahoma case is ongoing. On May 27, 2020, the Company moved to dismiss the action in the Eastern District of North Carolina under the first-to-file rule. Plaintiffs filed their opposition on June 17, 2020, and the Company filed its reply on July 1, 2020. The motion is fully briefed and awaiting the Court's decision. We intend to defend the Eastern District of North Carolina case vigorously; however, the Company cannot predict the outcome of this action. If the plaintiffs were to prevail, the Company could be liable for damages, which could have a material, adverse effect on our financial position and results of operations.
On February 21, 2017, Sanderson Farms, Inc. received an antitrust civil investigative demand from the Office of the Attorney General, Department of Legal Affairs, of the State of Florida. Among other things, the demand seeks information related to the Georgia Dock Index and other information on poultry and poultry products published by the Georgia Department of Agriculture and its Poultry Market News division. The Company is cooperating fully with the investigative demand, and we have responded to all requests received to date; however, we are unable to predict its outcome at this time. Separately, the Company has become aware that certain plaintiffs’ counsel in In re Broiler Chicken Antitrust Litigation received from the Office of the Attorney General, Department of Legal Affairs, of the State of Florida, an antitrust civil investigative demand that includes a request to produce all documents submitted by the recipients to the Department of Justice relating to In re Broiler
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Chicken Antitrust Litigation. The Company is also aware that certain plaintiffs’ counsel in In re Broiler Chicken Antitrust Litigation received from the Louisiana Department of Justice - Office of the Attorney General a Civil Investigation Demand that included a request to produce all deposition transcripts from the civil litigation. On August 6, 2020, the Company received a Civil Investigative Demand from the Office of the Attorney General for the State of Washington seeking information in connection with its investigation of alleged conspiracies in restraint of trade or commerce in the market for broiler chicken. The Company is cooperating with the investigative demand and coordinating with the Office of the Attorney General with respect to responding to its requests. The Company is unable to predict the outcome of the investigation at this time.
On June 22, 2017, the Company was named as a defendant in a lawsuit filed in the United States District Court for the Northern District of California. The complaint, which was brought by three non-profit organizations (the Organic Consumers Association, Friends of the Earth, and Center for Food Safety) alleged that the Company is violating the California Unfair Competition Law and the California False Advertising Law by representing that its poultry products are “100% Natural” products raised with “100% Natural” farming procedures. Among other things, the plaintiffs alleged that the Company’s products contain residues of human and animal antibiotics, other pharmaceuticals, hormones, steroids, and pesticides. Plaintiffs sought an order enjoining the Company from continuing its allegedly unlawful marketing program and requiring the Company to conduct a corrective advertising campaign; an accounting of the Company’s profits derived from the allegedly unlawful marketing practices; and attorneys’ fees, costs and interest. On August 2, 2017, the Company moved to dismiss the lawsuit on various grounds. On August 23, 2017, the plaintiffs filed an amended complaint, which included substantially similar allegations as the original complaint, and the Company filed a motion to dismiss the amended complaint on September 13, 2017. On February 9, 2018, the Court denied the Company’s motion to dismiss. An initial scheduling conference was held on March 1, 2018, and discovery started thereafter. On June 25, 2018, the plaintiffs amended their complaint for a second time, including to remove allegations that USDA had found the Company’s chicken samples to contain residues of antibiotics or other substances. On July 9, 2018, the Company filed a motion to dismiss the second amended complaint. On July 18, 2018, during the pendency of that motion, the parties stipulated to the voluntary dismissal of one of the plaintiff organizations (the Organic Consumers Association). The other two plaintiffs continued to prosecute their claims. On September 11, 2018, the Court granted the motion to dismiss the second amended complaint with leave to amend the complaint, and on October 2, 2018, the remaining plaintiffs filed a third amended complaint. The third amended complaint alleged that the Company misleads consumers with regard to (1) the presence of unnatural residues in its chicken products; (2) the fact that it uses antibiotics in raising its chickens; (3) the conditions in which it raises its chickens; and (4) the risks of human antibiotic resistance caused by the Company’s use of antibiotics. On October 16, 2018, the Company filed a motion to dismiss the third amended complaint, and on December 3, 2018, the Court denied that motion. Fact discovery concluded on March 18, 2019. On April 1, 2019, the Company filed a motion to dismiss for lack of subject matter jurisdiction on grounds that the remaining plaintiffs lacked standing. The Court held a hearing on the Company’s motion on May 30, 2019. On July 31, 2019, the Court granted the Company’s motion without prejudice, stating that dismissal for lack of standing must be without prejudice, but denied the plaintiffs leave to amend their complaint. On October 8, 2019, the Court taxed $12,701 in costs in favor of the Company as the prevailing party.
On August 30, 2019, plaintiffs filed a notice of appeal of the District Court’s order of dismissal before the United States Court of Appeals for the Ninth Circuit. Plaintiffs’ filed their opening brief on appeal on January 8, 2020, the Company filed its response brief on March 9, 2020, and Plaintiffs filed their reply brief on April 29, 2020. Oral argument is scheduled for October 13, 2020. We intend to vigorously defend the appeal. However, the Company cannot predict the outcome of this action. If the plaintiffs were to prevail, the Company’s reputation and marketing program could be materially, adversely affected, which could have a material, adverse effect on our financial position and results of operations.
On August 30, 2019, Sanderson Farms, Inc. and its Foods and Processing Divisions, as well as seventeen other poultry producers and their affiliates; Agri Stats, Inc.; and Webber, Meng, Sahl and Company, Inc. (“WMS”), were named in a putative class action filed in the United States District Court for the District of Maryland. Three other nearly identical putative class action complaints, each seeking to represent the same putative class, also were filed. The complaints, brought on behalf of non-supervisory production and maintenance employees at broiler chicken processing plants, alleged that the defendants unlawfully conspired by agreeing to fix and depress the compensation paid to them, including hourly wages and compensation benefits, from January 1, 2009 to the present. The plaintiffs claim that broiler producers shared competitively sensitive wage and benefits compensation information in three ways: (1) attending in-person meetings in Destin, Florida; (2) receiving Agri Stats reports, as well as surveys taken and published by WMS; and (3) directly exchanging wage and benefits information with plant managers at other defendant broiler producers. Plaintiffs allege that this conduct violated the Sherman Antitrust Act.
On November 12, 2019, the Court ordered that the four putative class action complaints would be consolidated for all pretrial purposes. The Court ordered plaintiffs to file their consolidated complaint on or before November 14, 2019. Defendants’ motions to dismiss the consolidated complaint were filed on November 22, 2019. Briefing was scheduled to be completed on or before February 28, 2020; however, after the defendants filed their motions to dismiss, on November 26, 2019,
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plaintiffs notified defendants that they intended to file an amended consolidated complaint. Plaintiffs filed an amended consolidated complaint on December 20, 2019. Plaintiffs name as defendants Sanderson Farms, Inc. and its Foods and Processing Divisions, as well as ten other broiler chicken producers and their affiliates; three turkey producers and their affiliates; Agri Stats, Inc.; and WMS. Plaintiffs bring their amended consolidated complaint on behalf of employees at broiler chicken and turkey processing plants and allege that the defendants unlawfully conspired by agreeing to fix and depress the compensation paid to them. On January 9, 2020 and January 27, 2020, the court approved the voluntary dismissal without prejudice of two of the three nearly identical putative class action lawsuits. On March 12, 2020, the Court approved the voluntary dismissal without prejudice of the third nearly identical putative class action lawsuit.
On March 2, 2020, defendants moved to dismiss the amended consolidated complaint. The Company also filed an individual motion to dismiss plaintiffs’ claims against the Company. Plaintiffs’ oppositions were originally due on April 24, 2020 and defendants’ replies were due on May 21, 2020. However, on March 20, 2020, the District of Maryland issued Second Amended Standing Order 2020-02, extending all filing deadlines set to fall between March 16, 2020 and April 24, 2020 by 42 days. On April 10, 2020, the District of Maryland issued Standing Order 2020-07, extending all filing deadlines set to fall between March 16, 2020 and June 5, 2020 by 84 days. On May 22, 2020, the District of Maryland issued Standing Order 2020-11, which affirmed the prior Order's 84-day extension but did not extend deadlines further. Pursuant to Standing Order 2020-07, plaintiffs’ filed their omnibus opposition to defendants’ motion to dismiss on July 17, 2020. Defendants filed replies on August 13, 2020. The motion is fully briefed and awaiting the Court's decision. No discovery has taken place to date. We intend to defend this case vigorously; however, the Company cannot predict the outcome of these actions. If the plaintiffs were to prevail, the Company could be liable for damages, which could have a material, adverse effect on our financial position and results of operations.
On October 11, 2019, three named plaintiffs - Daniel Lentz, Pam La Fosse, and Marybeth Norman - filed, in the United States District Court for the Northern District of California, a nationwide class action against the Company on behalf of a putative class of all individuals and businesses throughout the United States who purchased one or more of the Company's chicken products in the prior four years. The lawsuit alleges that the named plaintiffs and other class members purchased the Company's chicken products based on misleading representations in the Company’s advertising. Specifically, the plaintiffs in this case allege that the Company’s advertising (including, but not limited to, on its website, television commercials, radio advertisements, social media, print magazines, billboards, and trucks) misleads consumers into believing that (i) the Company’s chickens were not given antibiotics or other pharmaceuticals, (ii) the chickens were raised in a “natural” environment, (iii) there is no evidence that the use of antibiotics or other pharmaceuticals in poultry contributes to the evolution of antibiotic-resistant bacteria, and (iv) the Company’s chicken products do not contain antibiotic or pharmaceutical residues. Plaintiffs allege that (i) the Company “routinely” feeds antibiotics and pharmaceuticals to its chickens, (ii) the Company raises its chickens indoors in “unnatural” indoor conditions amounting to “intensive confinement” and without natural light (iii) there is “extensive” reliable evidence that the use of antibiotics in poultry contributes to antibiotic-resistant bacteria, and (iv) the Company’s chickens have been found to contain antibiotic and pharmaceutical residue. The original Complaint asserted five causes of action under California and North Carolina law. The plaintiffs sought injunctive relief directing the Company to correct its practices and to comply with consumer protection laws nationwide. The plaintiffs also sought monetary, compensatory, statutory, and punitive damages, as well as attorneys’ and experts’ fees, costs, and expenses. On December 20, 2019, the Company filed a motion to dismiss. On February 10, 2020, the Court granted the motion to dismiss in part, denied it in part, and granted the plaintiffs leave to amend the Complaint. On March 23, 2020, two of the three original plaintiffs (Pam La Fosse and Marybeth Norman) filed a First Amended Class Action Complaint in which they were joined by five additional named plaintiffs. The core allegations and theories set forth in the First Amended Complaint are the same as in the original complaint. The First Amended Complaint asserts one cause of action under federal law and sixteen causes of action under the laws of various states. The plaintiffs again seek injunctive relief directing the Company to correct its practices and to comply with consumer protection laws nationwide, as well as monetary, compensatory, statutory and punitive damages and attorneys' and experts' fees, costs and expenses. On May 6, 2020, the Company filed a motion to dismiss the First Amended Complaint, which the Court granted on July 2, 2020 with leave to amend. On July 23, 2020, plaintiffs Pam La Fosse and Sharon Manier filed a Second Amended Complaint on behalf of a putative class of consumers who purchased the Company's chicken in California in the prior four years. Like the earlier iterations of the complaint, the Second Amended Complaint alleges that the remaining plaintiffs and other class members purchased the Company's chicken products based on misleading representations in the Company's advertising, including for the reasons set forth in their prior complaints. On August 6, 2020, the Company moved to dismiss the Second Amended Complaint in part, requesting dismissal of plaintiffs' new implied warranty of merchantability claim. On August 20, 2020, plaintiffs voluntarily agreed to withdraw their new implied warranty claim. No discovery has taken place to date. We intend to defend this case vigorously; however, the Company cannot predict the outcome of these actions. If the plaintiffs were to prevail, the Company could be liable for damages, which could have a material, adverse effect on our financial position and results of operations.
On July 31, 2020, two non-profit organizations (In Defense of Animals and Friends of the Earth) filed a complaint against the Company in the United States District Court for the Northern District of California. The complaint asserts substantially similar (and in many cases identical) allegations and claims against the Company as the prior case brought by Friends of the
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Earth and other organizations, which the court dismissed in July 2019 and which is currently on appeal to the United States Court of Appeals for the Ninth Circuit. Specifically, the plaintiffs assert that the Company is violating the California Unfair Competition Law and the California False Advertising Law by representing that its poultry products are “100% Natural” products raised with “100% Natural” farming procedures. Plaintiffs allege that the Company’s advertising (including, but not limited to, on its website, television commercials, radio advertisements, social media, print magazines, billboards, and trucks) misleads consumers into believing that (i) the Company’s chickens were not given antibiotics or other pharmaceuticals, (ii) the chickens were raised in a “natural” environment, (iii) there is no evidence that the use of antibiotics or other pharmaceuticals in poultry contributes to the evolution of antibiotic-resistant bacteria, and (iv) the Company’s chicken products do not contain antibiotic or pharmaceutical residues. Plaintiffs allege that (i) the Company “routinely” feeds antibiotics and pharmaceuticals to its chickens, (ii) the Company raises its chickens indoors in “unnatural” indoor conditions amounting to “intensive confinement” and without natural light, (iii) there is “extensive” reliable evidence that the use of antibiotics in poultry contributes to antibiotic-resistant bacteria, and (iv) the Company’s chickens have been found to contain antibiotic and pharmaceutical residue. The plaintiffs seek injunctive relief directing the Company to correct its practices and to comply with consumer protection laws nationwide as well as in the form of a corrective advertising campaign. The plaintiffs also sought monetary, compensatory, statutory, and punitive damages, as well as attorneys’ and experts’ fees, costs, and expenses. On August 12, 2020, the Company agreed to waive service of the complaint. The Company's response to the complaint is due on October 6, 2020. No discovery has taken place to date. We intend to defend this case vigorously; however, the Company cannot predict the outcome of these actions. If the plaintiffs were to prevail, the Company could be liable for damages, which could have a material, adverse effect on our financial position and results of operations.
The Company is involved in various other claims and litigation incidental to its business. Although the outcome of these matters cannot be determined with certainty, management, upon the advice of counsel, is of the opinion that the final outcome of currently pending matters, other than those discussed above, should not have a material effect on the Company’s consolidated results of operations or financial position.
The Company recognizes the costs of legal defense for the legal proceedings to which it is a party in the periods incurred. After a considerable analysis of each case, the Company has determined that no accrual is required for any of the foregoing matters as of July 31, 2020. Future reserves may be required if losses are deemed reasonably estimable and probable due to changes in the Company’s assumptions, the effectiveness of legal strategies, or other factors beyond the Company’s control. Future results of operations may be materially affected by the creation of reserves or by accruals of losses to reflect any adverse determinations in these legal proceedings.
Item 1A. Risk Factors
In addition to the other information set forth in this quarterly report, you should carefully consider the risks discussed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019, including under the heading “Item 1A. Risk Factors,” which, along with risks described in this report, are risks we believe could materially affect the Company’s business, financial condition and future results. These are not the only risks facing the Company. Other risks and uncertainties we are not currently aware of or that we currently consider immaterial also may materially adversely affect the Company’s business, financial condition and future results. Risks we have identified but currently consider immaterial could still materially adversely affect the Company’s business, financial condition and future results if our assumptions about those risks are incorrect or if circumstances change.
There have been no material changes from the risk factors previously disclosed in the Company's Form 10-K for the fiscal year ended October 31, 2019, except as follows.
The COVID-19 pandemic has had, and may continue to have, a negative effect on our business.
The public health crisis caused by the COVID-19 pandemic and the measures taken by governments, businesses, including us, and the public at large to limit the spread of the disease have had, and may continue to have, a negative effect on our business including, without limitation, the following:
We have experienced a decrease in demand and commodity prices for products from our plants that serve food service customers, restaurants, and other customers who sell food for consumption away from home. These customers have been significantly negatively affected by stay-at-home restrictions or recommendations, closings of restaurants, social distancing requirements and cancellations of major sporting and other events. This negative trend may continue to some degree even though stay-at-home restrictions are being reduced or lifted because restaurants and other venues may be required to operate at reduced capacities and consumers may fear gathering in public places. In addition, a resurgence of COVID-19 infections after restrictions are lifted could cause governments to impose new or stricter stay-at-home and social distancing requirements, which could cause
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consumer demand for food away from home to worsen. While we have experienced increased demand for products from our plants that serve retail grocery store customers, that increase in demand cannot entirely offset the decrease in demand from our food service customers. We also cannot predict whether and to what extent recent changes in consumer food purchasing behavior will persist even after the threat of the pandemic has been eliminated or how those changes would affect our business.
Deteriorating economic and political conditions caused by the COVID-19 pandemic, such as increased unemployment, decreases in disposable income and consumer spending, declines in consumer confidence, changes in consumer buying patterns, or economic slowdowns or recessions, could cause a further decrease in demand for our products, especially products from our plants that serve food service customers.
We have experienced some disruption in our operations due to the pandemic, including higher than normal absenteeism related to COVID-19 among our hourly employees, inefficiencies from significant new hires, and delays due to additional health and safety procedures. While we have been able to operate despite these disruptions, a higher level of disruption could materially and adversely affect our operations. For example, although we are taking measures to protect our employees and prevent the spread of coronavirus in our facilities, these measures may not be sufficient to prevent an outbreak of infections among our employees. Government restrictions like social distancing regulations or limits on the number of persons who can be present in our facilities could also impair operations. The absence of a significant number of employees to staff our plants could cause a material reduction in our production volumes and could also hurt our ability to make certain products that require more labor to produce. If an outbreak at any of our facilities is severe, we could even be forced to close the facility, which in turn would constrain our ability to meet customer orders, increase our costs and reduce our revenues.
We have incurred additional expenses directly related to COVID-19, which consist primarily of additional wage expense to pay our $1 per hour attendance bonus, paid time off for employees who are not working for reasons related to COVID-19 and overtime expense to run our retail grocery store plants on Saturdays to meet increased demand. We have also incurred costs for personal protective equipment, cleaning and other measures we have taken in our facilities to protect against the spread of disease. These expenses may be ongoing for an uncertain period of time and could increase if we are required to take additional measures to continue to ensure we can continue to operate during the pandemic.
Some meat producers in the United States have experienced significant outbreaks of COVID-19 among their employees, which has caused some meat processing plants to close. This has led to public and media criticism of companies and the meat packing industry in general, including the poultry industry, for their management of the pandemic and working conditions for their employees. We could be affected by negative public perception of our industry resulting from the pandemic.
If the pandemic worsens in countries where we ship our products, we could face more significant delays than we have experienced to date in the delivery of our product in the export markets due to, among other things, additional safety requirements imposed by port authorities, closures of or congestion at ports, and other capacity constraints. Additionally, while we have so far not experienced significant delays in the distribution of our products to our customers within the United States, higher rates of infection or illness among truck drivers could create domestic shipping delays.
Declining oil prices, which have been caused in part by the contraction of commercial activity worldwide due to the pandemic, have limited and may continue to limit the ability of some of our export customers to purchase our products because their domestic economies depend on oil. Additionally, the value of the U.S. dollar against some foreign currencies has increased. This has led and may continue to lead to weaker demand and prices for our products in the export markets.
If the effects of the pandemic continue to cause market prices for our products to fall, then as explained in the Risk Factors section of our Annual Report on Form 10-K for our 2019 fiscal year, we may have to record adjustments to write down the carrying values of our live inventories in future quarters.
As a result of the COVID-19 pandemic, we have permitted some office-based employees who are at high risk for severe illness from COVID-19 to work remotely. Our information technology systems may be more vulnerable to cyber attacks or other disruptions as a result of team members accessing our networks and systems from off-site.
Actions we have taken or may take, or decisions we have made or may make, as a consequence of the COVID-19 pandemic may result in legal claims or litigation against us.
We rely on third-party service providers and business partners, such as independent contract poultry producers, cloud data storage and other information technology service providers, suppliers (particularly suppliers of feed
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grains), distributors, and other external business partners, for certain functions or for services in support of key portions of our operations. These third-party service providers and business partners are subject to risks and uncertainties related to the COVID-19 pandemic, which may interfere with their ability to fulfill their respective commitments and responsibilities to us in a timely manner and in accordance with the agreed-upon terms.
We may experience an increase in working capital needs and/or an increase in trade accounts receivable write-offs (and associated reserves) as a result of increased financial pressures on our suppliers or customers who are not able to pay in a timely manner or at all.
Depending on the duration of the pandemic and market conditions for our products, we may have a need to preserve liquidity, which could result in a reduction or suspension of our quarterly dividend or delays in implementing or an inability to implement our strategic planning initiatives.
The resumption of normal business operations after the disruptions caused by the COVID-19 pandemic may be delayed or constrained by its lingering effects on our customers, consumers, independent contract poultry producers or third-party service providers.
Governmental authorities in the United States may increase or impose new income taxes or indirect taxes, or revise interpretations of existing tax rules and regulations, as a means of financing the costs of stimulus and other measures enacted or taken, or that may be enacted or taken in the future, to protect the United States economy from the impact of the pandemic. Such actions could have a material adverse effect on our results of operations, financial condition and cash flows.
Any of the negative impacts of the COVID-19 pandemic, including those described above, may have a material adverse effect on our results of operations, financial condition and cash flows. Any of these negative impacts could exacerbate the risk factors discussed under the heading "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended October 31, 2019. The full extent to which the COVID-19 pandemic will negatively affect our results of operations, financial condition and cash flows will depend on future developments that are highly uncertain and that we cannot predict, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
A decrease in demand for our products in the export markets could materially and adversely affect our results of operations, financial condition and cash flows.
Nearly all of our customers are based in the United States, but we sell some of our product to foreign customers and some to United States based customers who resell the product in the export markets. Approximately 8.1% of our gross sales in fiscal 2019 were to export markets, including approximately $156.6 million to Mexico, $43.6 million to countries in Central Asia and $29.0 million to Cuba. Any disruption in the export markets could materially adversely affect our revenues or create an oversupply of poultry in the United States, which would cause domestic poultry prices to decline. Disruptions could include, for example:
trade embargoes, tariffs, import bans, duties, or quotas;
currency fluctuations;
adverse political, social or economic conditions in countries to which we export our products;
disruptions in shipping channels; and
changes in governmental trade policies or agreements with countries to which we sell products.
Any of these conditions could materially and adversely affect our revenues, results of operations, financial condition or cash flows.
For example, the outbreak of African swine fever in China has affected the worldwide supply of pork, which has in turn created a worldwide protein deficit. In November 2019, China lifted its nearly five-year ban on the import of United States poultry, and we resumed shipments almost immediately. The deficit of protein available to consumers in China as a result of the outbreak of African swine fever in that country has been widely expected to create additional demand for protein produced in the United States. However, the spread of COVID-19 in China and the government's actions taken to limit the spread of the virus depressed Chinese demand for protein during our first and second fiscal quarters of 2020 because quarantines limited travel within the country and restaurants were closed. Despite those travel restrictions, quarantines and reduced consumer demand, we continued receiving orders and shipping our products into China during our first and second quarters of fiscal 2020. Demand for products other than chicken paws softened during the third quarter of fiscal 2020 as cold storage inventories were rebuilt and consumers in China have been slow to return to restaurants in the same numbers as before the COVID-19 outbreak. Similar conditions have occurred in other countries to which we export our product as COVID-19 has spread. We do not know how long and to what extent the pandemic will impact demand for our products in export markets.
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Our operations, or those of our business partners, independent contract poultry producers and customers, and demand for our products could be adversely affected by events outside of our control such as natural disasters, terrorist attacks, epidemics, pandemics, war, or the fear of these events.
We may be affected by natural disasters, terrorist attacks, epidemics, pandemics like COVID-19, war or other events outside of our control. These events may impact our operations directly, or may disrupt the operations of our business partners, independent contract poultry producers and customers in ways that can adversely affect our results of operations, financial condition or cash flows. Fear of such events might also alter consumer confidence, behavior and spending patterns, which could decrease demand for protein, including our products.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the third quarter of fiscal 2020, the company repurchased shares of its common stock as follows:
Period
(a) Total Number of
Shares Purchased(1)
(b) Average Price
Paid per Share
(c) Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or
Programs(2)
(d) Maximum
Number (or
Approximate Dollar
Value) of Shares that
May Yet Be
Purchased Under the
Plans or Programs(2) (3)