NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
April 30, 2021
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 six months ended April 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending October 31, 2021.
The condensed consolidated balance sheet at October 31, 2020 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, 2020.
New Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. We adopted ASU 2016-13 during our first quarter of fiscal 2021, and adoption did not have a material effect on our consolidated financial statements. Under the new standard, we are required to record on our balance sheet an allowance for expected credit losses, which is estimated utilizing historical experience and current and expected economic conditions. Our allowance for expected credit losses is recorded on the accounts receivable, net line of the Condensed Consolidated Balance Sheets and is immaterial to our financial position.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Accounting Standards Codification 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2020, our fiscal 2022. We are currently evaluating the impact of this new guidance on our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. This guidance, which became effective on March 12, 2020, and can be applied through December 31, 2022, has not affected our consolidated financial statements. We have a revolving credit facility that references LIBOR, and we are assessing how this standard may be applied to specific contract modifications through December 31, 2022.
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 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:
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Product Category
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Three Months Ended April 30, 2021
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Three Months Ended April 30, 2020
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(in thousands)
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Fresh, chill-packed chicken
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$
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387,328
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$
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343,165
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Fresh, vacuum-sealed chicken
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428,661
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265,258
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Fresh, ice-packed chicken
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193,757
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|
130,798
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Frozen chicken
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71,924
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|
62,187
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Prepared chicken
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46,498
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38,810
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Other
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5,712
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4,493
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Total net sales
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$
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1,133,880
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$
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844,711
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Product Category
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Six Months Ended
April 30, 2021
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Six Months Ended
April 30, 2020
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(in thousands)
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Fresh, chill-packed chicken
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$
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763,580
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$
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630,432
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Fresh, vacuum-sealed chicken
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722,779
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576,554
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Fresh, ice-packed chicken
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325,438
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251,261
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Frozen chicken
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135,327
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108,861
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Prepared chicken
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85,413
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90,192
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Other
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10,649
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10,489
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Total net sales
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$
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2,043,186
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$
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1,667,789
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NOTE 3—INVENTORIES
Inventories consisted of the following:
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Inventory type
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April 30, 2021
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October 31, 2020
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(in thousands)
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Live poultry-broilers and breeders
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$
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223,762
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$
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180,013
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Feed, eggs and other
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60,290
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53,318
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Processed poultry
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41,645
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32,952
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Prepared chicken
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12,555
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16,142
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Packaging materials
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9,190
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7,582
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Total Inventories
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$
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347,442
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$
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290,007
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NOTE 4—PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net, consisted of the following:
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Description
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April 30, 2021
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October 31, 2020
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(in thousands)
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Land and buildings
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$
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952,118
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$
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931,674
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Machinery and equipment
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1,382,694
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1,350,725
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Work-in-process
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38,014
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16,914
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2,372,826
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2,299,313
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Less accumulated depreciation
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(1,141,720)
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(1,074,567)
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Property, plant and equipment, net
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$
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1,231,106
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$
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1,224,746
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NOTE 5—STOCK COMPENSATION PLANS
Refer to Note 10 and Note 11 of the Company’s October 31, 2020 audited financial statements in the Company's 2020 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 six months ended April 30, 2021 was $3.1 million and $5.8 million, respectively, as compared to total stock based compensation expense of $2.4 million and $5.2 million, respectively, for the three and six months ended April 30, 2020.
During the six months ended April 30, 2021, participants in the Company’s Management Share Purchase Plan ("MSPP") elected to receive a total of 3,662 shares of restricted stock at an average price of $142.88 per share instead of a specified percentage of their cash compensation, and the Company issued 869 matching restricted shares. During the three and six months ended April 30, 2021, the Company recorded compensation expense for the MSPP shares, included in the total stock based compensation expense above, of $125,000 and $200,000, respectively, as compared to $48,000 and $104,000, respectively, during the three and six months ended April 30, 2020.
During fiscal 2021, 2020 and 2019, 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, 2020 totaled 87,350. As of April 30, 2021, 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, 2019. The target number of shares specified in those agreements totaled 56,575. As of April 30, 2021, 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 performance period has lapsed for the performance share agreements that were entered into on November 1, 2018, and the Company's average return on equity and average return on sales did not meet the threshold amounts defined by those agreements. As a result, no compensation expense has been recorded related to those agreements.
Had the Company determined that it was probable that the maximum amount of those outstanding awards from the agreements entered into on November 1, 2019 and November 1, 2020 would be earned, an additional $9.0 million and $3.7 million of compensation expense, respectively, would have been accrued as of April 30, 2021.
The Company's compensation expense related to performance share agreements is summarized as follows (in thousands, except number of shares):
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Three Months Ended
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Six Months Ended
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Date of Performance Share Agreement
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Number of shares issued (actual (a) or estimated (e))
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April 30, 2021
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April 30, 2020
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April 30, 2021
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April 30, 2020
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November 1, 2017
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13,055 (a)
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$
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—
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$
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157
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$
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—
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$
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347
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November 1, 2018
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— (a)
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—
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—
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—
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—
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November 1, 2019 (1)
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— (e)
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—
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—
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—
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—
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November 1, 2020 (1)
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— (e)
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—
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—
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—
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—
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Total performance share compensation expense
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$
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—
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$
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157
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$
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—
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$
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347
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Note (1) - As of April 30, 2021, the Company could not determine that achievement of the applicable performance-based criteria is probable for the agreements entered into on November 1, 2019 and November 1, 2020, due to the uncertainties discussed above, and therefore recorded no compensation expense related to those agreements.
On November 1, 2020, the Company granted 87,350 shares of restricted stock to certain officers and key management employees. The restricted stock had a grant date fair value of $127.97 per share and will vest on November 1, 2024. On February 18, 2021, the Company granted an aggregate of 9,760 shares of restricted stock to all of its non-employee directors. The restricted stock had a grant date fair value of $153.65 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 April 30, 2021 related to all unvested restricted stock grants totaled 283,142. During the three and six months ended April 30, 2021, the Company recorded compensation expense, included in the total stock based compensation expense above, of $3.0 million and $5.6 million, respectively, related to restricted stock grants, as compared to $2.2 million and $4.7 million, respectively, during the three and six months ended April 30, 2020. The Company had $21.1 million in unrecognized share-based compensation expense as of April 30, 2021, which will be recognized over a weighted average remaining vesting period of approximately two years.
NOTE 6—EARNINGS PER SHARE
Certain share-based payment awards described in Note 5 - Stock Compensation Plans above entitling holders to receive non-forfeitable dividends before vesting are considered participating securities and thus are included in the calculation of basic earnings per share, to the extent they are dilutive. These awards are included in the calculation of basic earnings per share under the two-class method. The two-class method allocates earnings for the period between common shareholders and other security holders. The participating awards receiving dividends are allocated the same amount of income as if they were vested shares.
The following tables present earnings per share:
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Three Months Ended
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April 30, 2021
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April 30, 2020
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(in thousands, except per share amounts)
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Net income
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$
|
96,911
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|
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$
|
6,118
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Distributed and undistributed (earnings) to unvested restricted stock
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(1,343)
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(81)
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Distributed and undistributed earnings to common shareholders—Basic
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$
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95,568
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$
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6,037
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Weighted average shares outstanding—Basic
|
22,021
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|
21,943
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Weighted average shares outstanding—Diluted
|
22,021
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|
21,943
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Earnings per common share—Basic
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$
|
4.34
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|
$
|
0.28
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Earnings per common share—Diluted
|
$
|
4.34
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$
|
0.28
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Six Months Ended
|
|
April 30, 2021
|
|
April 30, 2020
|
|
(in thousands, except per share amounts)
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Net income (loss)
|
$
|
106,389
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|
$
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(32,458)
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Distributed and undistributed (earnings) to unvested restricted stock
|
(1,487)
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|
|
—
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Distributed and undistributed earnings (loss) to common shareholders—Basic
|
$
|
104,902
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|
|
$
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(32,458)
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Weighted average shares outstanding—Basic
|
22,015
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|
|
21,939
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Weighted average shares outstanding—Diluted
|
22,015
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|
|
21,939
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Earnings (loss) per common share—Basic
|
$
|
4.76
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|
|
$
|
(1.48)
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Earnings (loss) per common share—Diluted
|
$
|
4.76
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|
$
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(1.48)
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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 April 30, 2021 and October 31, 2020, the fair values of the Company's borrowings under its revolving credit facility approximate the carrying values.
NOTE 8—COMMITMENTS AND CONTINGENCIES
Litigation
In re Broiler Chicken Antitrust Litigation
Between September 2, 2016 and October 13, 2016, Sanderson Farms, Inc. and our subsidiaries were named as defendants, along with thirteen 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, adding 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. The Court granted the end-user consumer plaintiffs’ motion on September 22, 2020 and deemed the version of the complaint filed on August 7, 2020 operative on October 19, 2020. On October 23, 2020, the direct purchaser plaintiffs filed their fifth amended complaint and the commercial and institutional indirect purchaser plaintiffs filed their seventh amended complaint, both of which include bid-rigging allegations.
Between December 8, 2017 and May 18, 2021, additional purported direct-purchaser entities individually brought seventy-three separate suits against twenty poultry producers, including the Company, as well as Agri Stats, Inc. and Utrecht-America Holdings, Inc. ("Rabobank") 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. In addition, certain direct action complaints filed since June 12, 2020 include 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. Defendants filed replies on August 20, 2020 and September 3, 2020. On September 22, 2020, the Court ordered that plaintiffs’ bid-rigging allegations are bifurcated and any discovery on such claims is stayed until plaintiffs’ supply reduction and Georgia Dock Index theories are resolved. On October 20, 2020, certain direct action plaintiffs filed a motion for leave to amend their complaints. On October 23, 2020, certain direct action plaintiffs filed a consolidated complaint. Defendants filed an opposition to certain direct action plaintiffs’ motion to amend on November 4, 2020. Briefing was completed on November 16, 2020. The Court granted the motion to amend on January 6, 2021, and all direct action plaintiffs consolidated in the In re Broilers Chicken Antitrust Litigation before or on January 29, 2021 filed an amended consolidated complaint on January 29, 2021 incorporating those allegations.
On October 30, 2020, direct purchaser plaintiffs, commercial and institutional indirect purchaser plaintiffs, and end-user consumer plaintiffs filed motions for class certification. Defendants filed their oppositions to class certification on January 22, 2021. Class plaintiffs filed replies in support of class certification on March 29, 2021.
The parties are currently engaged in discovery. Fact discovery is scheduled to close on July 30, 2021, subject to limited extensions for certain direct action discovery. It is possible that additional individual actions will be filed.
Department of Justice Antitrust Investigation
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 United States Department of Justice in connection with its investigation.
State of New Mexico, ex rel. Hector Balderas v. Koch Foods Inc., et al.
On September 1, 2020, the Attorney General of the State of New Mexico filed a lawsuit in Santa Fe, New Mexico state court against Agri Stats, Inc. and producer defendants, including the Company. The lawsuit is substantially similar to those brought in In re Broiler Chicken Antitrust Litigation. The case also brings claims under the New Mexico Antitrust Act and New Mexico Unfair Trade Practices Act, as well as a common law unjust enrichment claim. Defendants responded to the complaint on February 1, 2021.
State of Alaska v. Agri Stats, Inc., et al.
On February 19, 2021, the Attorney General of the State of Alaska filed a lawsuit in Anchorage, Alaska state court against Agri Stats, Inc. and producer defendants, including the Company. The lawsuit is substantially similar to those brought in In re Broiler Chicken Antitrust Litigation. The case also brings claims under Alaska's antitrust statute and the Alaska Unfair Trade Practices and Consumer Protection Act, as well as a common law unjust enrichment claim. On May 12, 2021, certain defendants, including the Company, filed motions to dismiss the complaint for lack of personal jurisdiction, which remain pending.
We intend to defend the In re Broiler Chicken Antitrust Litigation and related 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.
In re Broiler Chicken Grower Litigation
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, the Company was named as a defendant, 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 the Company 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 pretrial 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 by staying the action in the Eastern District of North Carolina under the first-to-file rule, pending resolution of the action in the Eastern District of Oklahoma. On January 6, 2020, the Court in the Eastern District of Oklahoma denied the remaining 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 second amended consolidated complaint on February 21, 2020. 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.
On September 11, 2020, additional named grower plaintiffs filed an identical putative class action in the United States District Court for the District of Colorado against Sanderson Farms, Inc. and its Foods, Production, and Processing Divisions, as well as the other initial poultry producer defendants in the Oklahoma action. On October 14, 2020, defendants moved to dismiss the case under the first-to-file doctrine because it is substantively identical to the earlier-filed cases pending in Oklahoma and North Carolina. Briefing on that motion was completed on December 16, 2020.
On September 18, 2020, another named grower plaintiff filed another duplicate class action in the United States District Court for the District of Kansas against the same defendants as the Colorado action. On October 13, 2020, defendants moved to dismiss the case under the first-to-file doctrine because it is substantively identical to the earlier-filed cases pending in Oklahoma, North Carolina, and Colorado. Briefing on that motion was completed on December 15, 2020.
On October 8, 2020, new named grower plaintiffs filed another duplicate class action in the United States District Court for the Northern District of California against the same defendants as the Colorado and Kansas actions. The Company waived service of the complaint on December 11, 2020.
On October 23, 2020, the District Court of Kansas stayed proceedings in that action (other than those related to the first-to-file motion) pending resolution of the first-to-file motion and the multi-district litigation ("MDL") consolidation motion discussed below. On November 12, 2020, the District Court of Colorado stayed proceedings in that action (other than those related to the first-to-file motion) pending resolution of the first-to-file motion and the MDL consolidation motion discussed below.
On October 6, 2020, Plaintiffs in the Oklahoma action moved to consolidate all of these duplicative cases into a MDL before the judge presiding over the Oklahoma case. Briefing on that motion was completed on November 6, 2020, and oral argument on the motion occurred on December 3, 2020. On December 15, 2020, the panel ordered that all actions be consolidated in the Eastern District of Oklahoma for pretrial proceedings. The cases are consolidated as In re Broiler Chicken Grower Antitrust Litigation, No. 6:20-md-2977-RJS-CMR (E.D. Okla.). On February 12, 2021, the MDL Court held a status conference and entered a scheduling order for the MDL. On February 16, 2021, the first-to-file motions in the various actions described above were denied without prejudice. On February 19, 2021, Plaintiffs filed a consolidated amended complaint before the MDL Court. On March 31, 2021, the Company filed its answers to Plaintiffs' consolidated amended complaint. Discovery in the case is underway.
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.
Antitrust Civil Investigative Demands
On February 21, 2017, the Company received an antitrust civil investigative demand ("CID") 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 is also 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 CID 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 CID that includes a request to produce all deposition transcripts from the In re Broiler Chicken Antitrust Litigation.
On August 6, 2020, the Company received a CID from the Office of the Attorney General for the State of Washington seeking information in connection with its investigation of possible violations of the Washington Consumer Protection Act and/or the Sherman Act concerning contracts, combinations, or conspiracies in restraint of trade or commerce in the market for broiler chicken. The Company is cooperating with the investigative demand and providing documents and information as requested by the Office of the Attorney General for the State of Washington. The Company is unable to predict the outcome of the investigation at this time.
Separately, the Company is also aware that, On March 23, 2021, certain plaintiffs' counsel in In re Broiler Chicken Litigation also received a CID from the Office of the Attorney General for the State of Washington that includes a request to produce all deposition transcripts and expert reports from the In re Broiler Chicken Antitrust Litigation.
Friends of the Earth, et al v. Sanderson Farms, Inc.
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 the 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. Briefing was complete as of April 29, 2020, and the Court held oral argument on October 13, 2020. On March 31, 2021, a panel of the Ninth Circuit unanimously affirmed the District Court's dismissal. The organizations subsequently declined to seek reconsideration by the Ninth Circuit panel or en banc review by all active judges on the Ninth Circuit.
The organizations may still seek to file a petition for certiorari seeking review by the U.S. Supreme Court. In the event that they do, we intend to vigorously defend the appeal. However, the Company cannot predict the outcome of such an appeal. 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.
Judy Jien v. Perdue Farms, Inc., et al.
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. 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 named 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 brought 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 filed their omnibus opposition to defendants’ motions to dismiss on July 17, 2020. Defendants filed their reply briefs on August 13, 2020. On September 16, 2020, the Court granted in part and denied in part defendants’ motion without prejudice, finding that plaintiffs’ allegations against certain corporate defendant families, including the Company, were deficient.
Plaintiffs filed a second amended consolidated complaint against the Company on November 2, 2020. The Company filed a renewed motion to dismiss resisting plaintiffs' amended allegations on December 18, 2020. The Court denied that motion on March 10, 2021. Discovery in the case is underway.
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.
La Fosse, et al. v. Sanderson Farms, Inc.
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 Company's 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 damages, as well as fees and costs. 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 complaint in which they were joined by five additional named plaintiffs purporting to assert claims on behalf of a putative nationwide class of consumers and businesses who purchased the Company's chicken products in the prior four years. The core allegations and theories set forth in the first amended complaint are the same as in the original complaint. The first amended complaint asserted one cause of action under federal law and sixteen causes of action under the laws of various states. The plaintiffs again sought injunctive relief directing the Company to correct its practices and to comply with consumer protection laws nationwide, as well as monetary damages, fees and costs. On May 6, 2020, the Company filed a partial 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. The plaintiffs again seek injunctive relief, monetary damages, fees and costs. 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. Discovery commenced in October 2020 and is ongoing.
We intend to defend this 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.
In Defense of Animals, et al. v. Sanderson Farms, Inc.
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 the Ninth Circuit unanimously confirmed in March 2021. Specifically, the plaintiffs assert that the Company violates 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 Company's 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 seek fees and costs.
The parties initially stipulated to a stay of the case pending resolution of the appeal in the related Friends of the Earth case. Following the Ninth Circuit's affirmance of the District Court's dismissal of that case, the Company moved to dismiss the In Defense of Animals case on April 28, 2021. In response to the Company's motion to dismiss, plaintiffs filed an amended complaint on May 26, 2021. The Company's responsive pleading is due on June 25, 2021. No discovery has taken place to date.
We intend to defend this 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.
Other
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.
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 April 30, 2021. 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
The Company is a party to a revolving credit facility dated April 23, 2021, 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 April 30, 2021, was $1.0 billion. The credit is unsecured and, unless extended, will expire on April 23, 2026. As of April 30, 2021 and May 26, 2021, the Company had borrowed $55.0 million and had approximately $25.2 million outstanding in letters of credit, leaving $919.8 million of borrowing capacity available under the facility.
NOTE 10—INCOME TAXES
The Company’s estimated annual effective tax rates for the three and six months ended April 30, 2021 were 23.7% and 23.9%, respectively, as compared to effective tax rates of 113.4% and 66.4%, respectively, for the three and six months ended April 30, 2020. Excluding the effects of discrete items recognized during the periods, the Company's estimated annual effective tax rates for the three and six months ended April 30, 2021 would have been approximately 23.8% and 23.8%, respectively, as compared to effective tax rates of 30.2% and 26.9%, respectively, for the three and six months ended April 30, 2020. The discrete items recognized during the three and six months ended April 30, 2020 are primarily related to the Coronavirus Aid, Relief, and Economic Security Act ("the CARES Act") and are described in more detail below. The Company estimates its effective tax rate for the full fiscal year 2021, exclusive of discrete items, will be approximately 23.8%.
Our financial statements for the three and six months ended April 30, 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 during the fiscal 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 three and six months ended April 30, 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 $49.4 million discrete income tax benefit related to the carry-back provisions during the three and six months ended April 30, 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 $11.9 million discrete income tax expense during the three and six months ended April 30, 2020 to account for the reduced taxable income.
As of April 30, 2021, the Company's deferred income tax liability was $145.4 million, as compared to $141.7 million at October 31, 2020, an increase of $3.7 million.
NOTE 11—INSURANCE RECEIVABLE
Our operations in Texas, Louisiana and Mississippi were affected by significant winter weather events that began impacting the region on or around February 13, 2021. Because of record low temperatures, power failures, snow and ice, and hazardous road conditions during the week of February 15, 2021, we were unable to operate our processing plants in those states, deliver day old chicks to broiler farms on our regular schedule, pick up hatching eggs from breeder farms and place those eggs in our hatcheries on our regular schedule, or manufacture and deliver chicken feed to the farms of our independent contract producers on our regular schedule. None of our facilities or our equipment were significantly damaged, our employees remained safe and we returned to normal operations on February 22, 2021, except for our Hazlehurst, Mississippi processing plant, which returned to normal operations on February 23, 2021. However, our live production supply chain experienced interruptions and losses. We lost 639,000 broilers in houses that either lost water, power or feed, or collapsed under the weight of snow and ice. Because the hazardous road conditions prevented us from delivering day old chicks to broiler farms on our regular schedule, we were forced to humanely euthanize 545,000 chicks in our Texas hatcheries. We were also unable to pick up and place approximately 665,000 hatching eggs in our hatcheries on our normal schedule.
Our financial statements as of April 30, 2021 include a $4.0 million receivable from insurance carriers for property damage and expenses incurred as a result of the storms, net of the applicable self-insured retention and deductibles. The Company's applicable insurance policy includes a $2.5 million self-insured, eroding retention per policy year and an additional $250,000 deductible per occurrence. As a result, the Company's operating results for the second quarter of fiscal 2021 and the six months ended April 30, 2021 include $2.75 million in cost of goods sold for losses and expenses related to the winter storms. Additionally, the Company's operating results for the second quarter of fiscal 2021 and the six months ended April 30, 2021 were negatively affected by business interruption losses which were the direct result of the winter storms. While we expect to recover some portion of the business interruption losses, we are subject to a seven-day waiting period deductible under the applicable insurance policy. We continue to work with our insurers, adjusters and forensic accountants to refine the calculation of losses stemming from the storms, as well as the amount of those losses applicable to the deductible period. Any recoveries of the business interruption losses will be recognized once the calculations of the claims and negotiations with our insurance carriers are complete.