Company Quick10K Filing
Sanderson Farms
Price156.00 EPS2
Shares22 P/E65
MCap3,464 P/FCF17
Net Debt-40 EBIT68
TEV3,423 TEV/EBIT50
TTM 2019-10-31, in MM, except price, ratios
10-Q 2020-07-31 Filed 2020-08-27
10-Q 2020-04-30 Filed 2020-05-28
10-Q 2020-01-31 Filed 2020-02-27
10-K 2019-10-31 Filed 2019-12-19
10-Q 2019-07-31 Filed 2019-08-29
10-Q 2019-04-30 Filed 2019-05-30
10-Q 2019-01-31 Filed 2019-02-26
10-K 2018-10-31 Filed 2018-12-20
10-Q 2018-07-31 Filed 2018-08-23
10-Q 2018-04-30 Filed 2018-05-24
10-Q 2018-01-31 Filed 2018-02-21
10-K 2017-10-31 Filed 2017-12-14
10-Q 2017-07-31 Filed 2017-08-24
10-Q 2017-04-30 Filed 2017-05-25
10-Q 2017-01-31 Filed 2017-02-23
10-K 2016-10-31 Filed 2016-12-15
10-Q 2016-07-31 Filed 2016-08-25
10-Q 2016-04-30 Filed 2016-05-26
10-Q 2016-01-31 Filed 2016-02-25
10-K 2015-10-31 Filed 2015-12-17
10-Q 2015-07-31 Filed 2015-08-25
10-Q 2015-04-30 Filed 2015-05-28
10-Q 2015-01-31 Filed 2015-02-24
10-K 2014-10-31 Filed 2014-12-18
10-Q 2014-07-31 Filed 2014-08-26
10-Q 2014-04-30 Filed 2014-05-29
10-Q 2014-01-31 Filed 2014-02-25
10-K 2013-10-31 Filed 2013-12-17
10-Q 2013-07-31 Filed 2013-08-27
10-Q 2013-04-30 Filed 2013-05-30
10-Q 2013-01-31 Filed 2013-02-21
10-K 2012-10-31 Filed 2012-12-18
10-Q 2012-07-31 Filed 2012-08-28
10-Q 2012-04-30 Filed 2012-05-29
10-Q 2012-01-23 Filed 2012-02-28
10-K 2011-10-31 Filed 2011-12-20
10-Q 2011-07-31 Filed 2011-08-25
10-Q 2011-04-30 Filed 2011-05-24
10-Q 2011-01-31 Filed 2011-02-24
10-K 2010-10-31 Filed 2010-12-14
10-Q 2010-07-31 Filed 2010-08-23
10-Q 2010-04-30 Filed 2010-05-25
10-Q 2010-01-31 Filed 2010-02-23
8-K 2020-08-27 Earnings, Exhibits
8-K 2020-05-28
8-K 2020-04-02
8-K 2020-03-23
8-K 2020-02-27
8-K 2020-02-12
8-K 2019-12-19
8-K 2019-10-23
8-K 2019-09-09
8-K 2019-08-30
8-K 2019-08-29
8-K 2019-07-18
8-K 2019-05-30
8-K 2019-03-21
8-K 2019-02-26
8-K 2019-02-14
8-K 2019-01-24
8-K 2019-01-16
8-K 2018-12-20
8-K 2018-11-25
8-K 2018-10-17
8-K 2018-09-20
8-K 2018-08-23
8-K 2018-08-07
8-K 2018-05-31
8-K 2018-05-24
8-K 2018-02-21
8-K 2018-02-15
8-K 2018-01-18

SAFM 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Note 1 - Accounting Policies
Note 2 - Revenue
Note 3 - Inventories
Note 4 - Property, Plant and Equipment
Note 5 - Stock Compensation Plans
Note 6 - Earnings per Share
Note 7 - Fair Value of Financial Instruments
Note 8 - Commitments and Contingencies
Note 9 - Credit Agreement
Note 10 - Income Taxes
Note 11 - Leases
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.1 safm-20200731xex101.htm
EX-10.2 safm-20200731xex102.htm
EX-31.1 safm-20200731xex311.htm
EX-31.2 safm-20200731xex312.htm
EX-32.1 safm-20200731xex321.htm
EX-32.2 safm-20200731xex322.htm

Sanderson Farms Earnings 2020-07-31

Balance SheetIncome StatementCash Flow
1.81.41.10.70.40.02012201420172020
Assets, Equity
1.00.80.60.30.1-0.12012201420172020
Rev, G Profit, Net Income
0.20.10.0-0.0-0.1-0.22012201420172020
Ops, Inv, Fin

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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)
___________________________
Mississippi64-0615843
(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 classTrading SymbolName of each exchange on which registered
Common Stock, $1 par value per shareSAFMNASDAQ
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 filerAccelerated 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
TABLE OF CONTENTS
SANDERSON FARMS, INC. AND SUBSIDIARIES
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.
2

Table of Contents
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, net150,773 131,778 
Receivable from insurance companies 445 
Inventories285,941 289,928 
Refundable income taxes41,247 6,612 
Prepaid expenses and other current assets66,249 56,931 
Total current assets610,329 581,111 
Property, plant and equipment, net1,229,771 1,185,860 
Right of use assets42,473  
Other assets5,982 7,163 
Total assets$1,888,555 $1,774,134 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$102,753 $132,741 
Dividends payable7,117  
Accrued expenses94,836 82,940 
Lease liabilities14,401  
Total current liabilities219,107 215,681 
Long-term debt95,000 55,000 
Claims payable and other liabilities11,801 11,646 
Deferred income taxes135,287 74,132 
Long-term lease liabilities28,072  
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 capital88,582 86,010 
Retained earnings1,288,466 1,309,461 
Total stockholders’ equity1,399,288 1,417,675 
Total liabilities and stockholders’ equity$1,888,555 $1,774,134 
See notes to condensed consolidated financial statements.
3

Table of Contents
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,
 2020201920202019
Net sales$956,455 $945,152 $2,624,244 $2,533,769 
Cost and expenses:
Cost of sales865,997 824,144 2,521,804 2,273,377 
Selling, general and administrative50,590 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 income466  466  
Interest expense(1,521)(1,492)(4,492)(3,174)
Other2 4 7 6 
(1,053)(1,488)(4,019)(3,168)
Income (loss) before income taxes38,815 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

Table of Contents
SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(In thousands, except shares and per share amounts)
Fiscal Year 2019Common StockPaid-In
Capital
Retained
Earnings
Total
Stockholders’
Equity
SharesAmount
Balance at October 31, 201822,099,780 $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 transactions53,688 53 (2,126) (2,073)
Amortization of unearned compensation  2,313  2,313 
Balance at January 31, 201922,153,468 $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 transactions777 1 1,628  1,629 
Amortization of unearned compensation  2,325  2,325 
Balance at April 30, 201922,154,245 $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, 201922,152,741 $22,153 $88,891 $1,339,421 $1,450,465 

Fiscal Year 2020Common StockPaid-In
Capital
Retained
Earnings
Total
Stockholders’
Equity
SharesAmount
Balance at October 31, 201922,203,920 $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 transactions25,292 25 (4,721) (4,696)
Amortization of unearned compensation  2,082  2,082 
Balance at January 31, 202022,229,212 $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 transactions10,362 10 1,099  1,109 
Amortization of unearned compensation  1,960  1,960 
Balance at April 30, 202022,239,574 $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 transactions399 1 152  153 
Amortization of unearned compensation  2,000  2,000 
Balance at July 31, 202022,239,973 $22,240 $88,582 $1,288,466 $1,399,288 
See notes to condensed consolidated financial statements.
5

Table of Contents
SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
 Nine Months Ended 
 July 31,
 20202019
Operating activities
Net income$352 $76,165 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization115,274 97,829 
Amortization of share-based compensation7,500 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 taxes61,155 21,000 
Loss on asset disposals328  
Change in assets and liabilities:
Accounts receivable - trade(18,995)(8,294)
Accounts receivable - insurance445 1,494 
Income taxes(34,635)25,719 
Inventories6,787 (56,590)
Prepaid expenses and other assets(8,955)(17,729)
Right of use assets12,173  
Lease liabilities(12,173) 
Accounts payable(23,021)5,330 
Accrued expenses and other liabilities12,285 9,099 
Total adjustments115,368 75,919 
Net cash provided by operating activities115,720 152,084 
Investing activities
Capital expenditures(165,998)(210,878)
Net proceeds from sale of property and equipment336 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 credit145,000 100,000 
Payments on revolving line of credit(105,000)(70,000)
Proceeds from issuance of restricted stock under stock compensation plans879 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 activities20,644 10,328 
Net change in cash and cash equivalents(29,298)(46,931)
Cash and cash equivalents at beginning of period95,417 121,193 
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.
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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 CategoryThree Months Ended July 31, 2020Three Months Ended July 31, 2019
Fresh, vacuum-sealed chicken$303,746 $365,446 
Fresh, chill-packed chicken395,110 301,795 
Fresh, ice-packed chicken133,302 146,117 
Prepared chicken52,305 67,825 
Frozen chicken67,094 58,073 
Other4,898 5,896 
Total net sales$956,455 $945,152 

Product CategoryNine Months Ended July 31, 2020Nine Months Ended July 31, 2019
Fresh, vacuum-sealed chicken$880,300 $956,228 
Fresh, chill-packed chicken1,025,542 839,563 
Fresh, ice-packed chicken384,563 378,576 
Prepared chicken142,497 187,216 
Frozen chicken175,955 150,773 
Other15,387 21,413 
Total net sales$2,624,244 $2,533,769 
NOTE 3—INVENTORIES
Inventories consisted of the following (in thousands):
Inventory typeJuly 31, 2020October 31, 2019
Live poultry-broilers and breeders$191,863 $179,870 
Feed, eggs and other42,677 47,417 
Processed poultry32,922 35,121 
Prepared chicken9,934 20,032 
Packaging materials8,545 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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DescriptionJuly 31, 2020October 31, 2019
Land and buildings$921,571 $892,089 
Machinery and equipment1,322,257 1,236,095 
Work-in-process34,943 11,149 
2,278,771 2,139,333 
Less accumulated depreciation1,049,000 953,473 
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 $4.5 million, respectively, would have been accrued as of July 31, 2020.
The Company's compensation cost related to performance share agreements is summarized as follows (in thousands, except number of shares):
Three Months Ended Nine Months Ended
Date of Performance Share AgreementNumber of shares issued (actual (a) or estimated (e))July 31, 2020July 31, 2019July 31, 2020July 31, 2019
November 1, 201684,511 (a)$ $596 $ $1,859 
November 1, 201713,093 (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, 2020July 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—Basic21,946 21,835 
Weighted average shares outstanding—Diluted21,946 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, 2020July 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—Basic21,942 21,826 
Weighted average shares outstanding—Diluted21,942 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.