SANDERSON FARMS, INC. The following should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of the Company's Annual Report on Form 10-K for its fiscal year endedOctober 31, 2021 . This Quarterly Report, and other periodic reports filed by the Company under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and other written or oral statements made by it or on its behalf, may include forward-looking statements within the meaning of the "Safe Harbor" provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements are based on a number of assumptions about future events and are subject to various risks, uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and estimates expressed in such statements. These risks, uncertainties and other factors include, but are not limited to, the risks described in the "Risk Factors" sections of our latest 10-K and 10-Q reports, and the following:
(1)Changes in the market price for the Company's finished products and feed grains, both of which may fluctuate substantially and exhibit cyclical characteristics typically associated with commodity markets.
(2)Changes in economic and business conditions, monetary and fiscal policies or the amount of growth, stagnation or recession in the global orU.S. economies, any of which may affect the value of inventories, the collectability of accounts receivable or the financial integrity of customers, and the ability of the end user or consumer to afford protein. (3)Changes in the political or economic climate, trade policies, laws and regulations or the domestic poultry industry of countries to which the Company or other companies in the poultry industry ship product, and other changes that might limit the Company's or the industry's access to foreign markets. (4)Changes in laws, regulations, and other activities in government agencies and similar organizations applicable to the Company and the poultry industry and changes in laws, regulations and other activities in government agencies and similar organizations related to food safety. (5)Various inventory risks due to changes in market conditions, including, but not limited to, the risk that net realizable values of live and processed poultry inventories might be lower than the cost of such inventories, requiring a downward adjustment to record the value of such inventories at the lower of cost or net realizable value as required by generally accepted accounting principles. (6)Changes in and effects of competition, which is significant in all markets in which the Company competes, and the effectiveness of marketing and advertising programs. The Company competes with regional and national firms, some of which have greater financial and marketing resources than the Company.
(7)Changes in accounting policies and practices adopted voluntarily by the
Company or required to be adopted by accounting principles generally accepted in
(8)Disease outbreaks affecting the production, performance and/or marketability of the Company's poultry products, or the contamination of its products.
(9)Changes in the availability and cost of labor and growers.
(10)The loss of any of the Company's major customers.
(11)Inclement weather that could hurt Company flocks or otherwise adversely affect the Company's operations, or changes in global weather patterns that could affect the supply and price of feed grains.
(12)Failure to respond to changing consumer preferences and negative or competitive media campaigns.
(13)Failure to successfully and efficiently start up and run a new plant or integrate any business the Company might acquire.
(14)Unfavorable results from currently pending litigation and proceedings, or litigation and proceedings that could arise in the future.
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(15)Changes resulting from the COVID-19 pandemic, which could exacerbate any of the risks described above, and could include: high absentee rates that have prevented and may continue to prevent us from running some of our facilities at full capacity, or could in the future cause facility closures; an inability of our contract growers to manage their flocks; supply chain disruptions for feed grains; further changes in customer orders due to shifting consumer patterns; disruptions in logistics and the distribution chain for our products; liquidity challenges; and a continued or worsening decline in global commercial activity, among other unfavorable conditions. (16)Risks relating to the Company's entry into a definitive agreement to be acquired by a joint venture betweenCargill, Incorporated ("Cargill") andContinental Grain Company ("CGC"), including: the timing, receipt and terms and conditions of any required governmental or regulatory approvals of the proposed transaction and the related transactions involving affiliates ofCargill and CGC that could reduce the anticipated benefits of or cause the parties to abandon the proposed transaction; risks related to the satisfaction of the conditions to closing the proposed transaction (including the failure to obtain necessary regulatory approvals), and the related transactions involving affiliates ofCargill and CGC, in the anticipated timeframe or at all; the risk that any announcements relating to the proposed transaction could have adverse effects on the market price of the Company's common stock; disruption from the proposed transaction making it more difficult to maintain business and operational relationships, including retaining and hiring key personnel and maintaining relationships with the Company's customers, vendors and others with whom it does business; the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement entered into pursuant to the proposed transaction or of the transactions involving affiliates ofCargill and CGC; risks related to disruption of management's attention from the Company's ongoing business operations due to the proposed transaction; significant transaction costs; and the risk of litigation and/or regulatory actions related to the proposed transaction or unfavorable results from litigation and proceedings that could arise in the future. Readers are cautioned not to place undue reliance on forward-looking statements made by or on behalf ofSanderson Farms . Each such statement speaks only as of the day it was made. The Company undertakes no obligation to update or to revise any forward-looking statements. The factors described above cannot be controlled by the Company. When used in this report, the words "believes," "estimates," "plans," "expects," "should," "outlook," and "anticipates" and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. Examples of forward-looking statements include statements about management's beliefs about future growth plans, earnings, production levels, capital expenditures, grain prices, global economic conditions, supply and demand factors and other industry conditions.
GENERAL
The Company's poultry operations are fully, vertically-integrated through its
control of all functions relating to the production of its chicken products,
including hatching egg production, hatching, feed manufacturing, raising
chickens to marketable age ("grow-out"), processing and marketing. Consistent
with the poultry industry, the Company's profitability is substantially affected
by the market price for its finished products and feed grains, both of which may
fluctuate substantially and independently of each other, and exhibit cyclical
characteristics typically associated with commodity markets. Other costs,
excluding feed grains, related to the profitability of the Company's poultry
operations, including hatching egg production, hatching, growing, and processing
costs, are responsive to efficient cost containment programs and management
practices.
The Company believes that value-added products are subject to less price
volatility and generate higher, more consistent profit margin than whole
chickens ice-packed and shipped in bulk form. To reduce its exposure to market
cycles that have historically characterized commodity chicken market prices, the
Company has increasingly concentrated on the production and marketing of
value-added product lines with emphasis on product quality, customer service,
and brand recognition. However, the Company cannot eliminate its exposure to
fluctuations in commodity market prices for chicken since market prices for
value-added products also demonstrate cyclical characteristics typical of
commodity markets. The Company adds value to its poultry products by performing
one or more processing steps beyond the stage where the whole chicken is first
salable as a finished product, such as cutting, deboning, deep chilling,
packaging and labeling the product.
The Company also has a prepared chicken product line that includes approximately
55 institutional and consumer-packaged chicken items that it sells nationally,
primarily to distributors and food service establishments. A majority of the
prepared chicken items are made to the specifications of food service users.
COVID-19
The effects of the COVID-19 pandemic and the related governmental actions to
contain the spread of the novel coronavirus have materially affected our
business, including our labor force, revenues, expenses, production levels, and
senior management's time, among other things.
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In lateFebruary 2020 , we formed a COVID-19 response team of senior managers, including our CEO, President, and CFO, to coordinate our response to the pandemic and manage and mitigate related risks. Additionally, our Board of Directors has actively overseen our management of and response to the pandemic. During the first few months of the pandemic, the Board met weekly to receive updates and discuss our response with our executive leadership team. Today, the Board continues to receive COVID-19-related updates as conditions warrant. Our top priority throughout the crisis has been protecting the health, safety and welfare of our employees. In consultation with infectious disease specialists and epidemiologists, including an infectious disease expert who toured our facilities, we implemented a number of steps and procedures to promote health and safety in our operations. We continue to consult with experts and update our protocols and procedures as the number of infections nationwide and in the areas in which we operate fluctuates. Practices that remain in place include, but are not limited to, the following: •We have on-site medical clinics at each of our processing plants that are staffed by third-party medical providers. The clinics provide telemedicine services, flu and coronavirus tests, and flu and coronavirus vaccinations at no cost to our employees.
•Any employee who becomes fully-vaccinated against COVID-19 receives a
•In areas of our facilities where space allows, we have implemented social distancing measures, and in areas where equipment configurations allow, we have installed physical barriers between work stations. Additionally, we have optimized ventilation throughout our facilities to mitigate the risk of exposure to the virus.
•A third-party sanitation service provider performs an antiviral sanitation process as needed at our facilities, and we have increased the frequency of cleaning common areas and frequently touched surfaces.
•We continuously track COVID-19 positive cases and exposure within our workforce, and impose isolation or quarantine periods that vary based on individual circumstances.
The COVID-19 response team met daily throughout the first quarter of fiscal 2022 to coordinate our response to the threat of the new Omicron variant of the virus, which significantly impacted all of the communities in which we operate. As the number of active cases across our geographic footprint dropped significantly duringFebruary 2022 , the team transitioned to meeting on an as needed basis. In the second quarter and first six months of fiscal 2022, we incurred approximately$3.1 million and$10.0 million , respectively, in costs directly related to COVID-19. These included payroll expenses for employees who were quarantined, vaccination bonuses, and items and services related to workplace safety, including personal protective equipment, thermometers, barriers and other social-distancing measures, professional cleaning, on-site medical clinics, and additional nursing staff, among other things. By comparison, our results for the second quarter and first six months of fiscal 2021 included approximately$8.6 million and$20.1 million , respectively, in direct COVID-19 expenses.
EXECUTIVE OVERVIEW OF RESULTS
For the second quarter of fiscal 2022, we earned net income of$321.2 million , or$14.39 per share, as compared to net income of$96.9 million , or$4.34 per share, during the second quarter of fiscal 2021. The significant improvement in our results during the second quarter of fiscal 2022 as compared to the second quarter of fiscal 2021 is primarily attributable to an increase in the average selling prices for our products of$0.3110 per pound sold, or 33.6%, partially offset by an increase in feed costs per pound of broilers processed of$0.0449 , or 14.1%, as well as higher non-feed costs. The increase in average selling prices for fresh and frozen chicken products during the second quarter of fiscal 2022 versus the same quarter a year ago reflects significantly higher realized prices for products from our plants that process a larger bird primarily for food service customers and further processors. These prices are determined by contractually negotiated formulas based on published quotes for chicken products. The quoted market prices typically move higher or lower based on the supply and demand dynamics of chicken products sold into the food service market. The higher quoted market prices during the quarter reflect significantly improved demand from food service customers as consumers continue to become more comfortable dining away from home given improving pandemic conditions, combined with a limited supply and relatively elevated prices of competing proteins. This strong demand for chicken has coincided with constraints on the supply side, including limited capacity expansion in the industry due to labor shortages, supply chain logistics, and elevated construction costs. In addition, theUnited States Department of Agriculture ("USDA") reports low hatchability rates for hatching eggs and well below average livability rates for broiler chickens. Finally, while somewhat constrained by logistical challenges, export demand has improved relative to a year ago, which has further strengthened domestic market prices for chicken products. Realized prices for products sold to retail grocery store customers were also higher when compared to a year ago. These prices are typically negotiated on an annual basis, use either a flat price or a pricing formula based on a regularly quoted market price, and are fixed for one to three years. However, many of these contracts include provisions that allow either party to 19
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request price adjustments during the term of the agreements to reflect material changes in grain and other costs and other factors. While neither party is required to adjust prices, we have been able to negotiate price increases during the contract terms with many of our grocery store customers over the past few quarters to reflect materially higher grain costs and continued strong consumer demand for chicken at grocery stores. A portion of the price increases were fully reflected in the first quarter of fiscal 2022, resulting in a 7.0% increase in average realized prices for products sold to retail grocery store customers when compared to the first quarter of fiscal 2021. A larger portion of the negotiated price increases were effective either during January orFebruary 2022 and were fully reflected in our second fiscal quarter of fiscal 2022, resulting in a 13.1% increase in average realized selling prices when compared to the second quarter of fiscal 2021 and a 7.7% increase when compared to the first quarter of fiscal 2022. Although these price increases have significantly improved our margins earned on products sold to retail grocery stores, such margins continue to lag behind those earned on products sold to food service and further processor customers, due in part to higher grain costs, as discussed below. Finally, additional negotiated price increases became effective in April orMay 2022 or will become effective inJune 2022 and will be reflected in our results for our third fiscal quarter of 2022. Demand for our products from our traditional export partners has improved from levels we experienced during the early stages of the pandemic. We believe this relative strength is the result of several factors, including the benefit of higher crude oil prices to countries whose economies depend on oil, the value ofthe United States dollar in relation to foreign currencies, and the lessening of governmental restrictions related to COVID-19. However, duringDecember 2021 , a highly pathogenic strain of avian influenza ("AI") was detected inNorth America and has since been detected in many wild birds and commercial poultry flocks acrossthe United States , including one of our broiler flocks inNorth Carolina . AI was also detected in a commercial pheasant flock inTexas , a state in which we operate. To date, no cases of AI have been detected in commercial flocks in any other state in which we operate. We have initiated our Crisis Management Response for Avian Influenza and are taking appropriate and best practice steps to protect the health of our flocks.China andMexico , the top two countries by volume and value to which we export, initially ban all product from any state where AI is detected in a commercial flock.Mexico will subsequently initiate a process to coordinate withUnited States officials to reduce the ban from a statewide level to a county level as specified information regarding detection and remediation of AI is provided, and that process has been completed for bothTexas andNorth Carolina . It isChina's policy to leave the statewide import ban in place until ninety days following the date thatthe United States government certifies the most recently affected farm in the state has been cleaned and disinfected, which has not yet occurred in eitherTexas orNorth Carolina . Barring any additional AI findings inTexas , we estimateChina's ban on product fromTexas will be lifted during the latter part ofJuly 2022 . Barring any additional AI findings inNorth Carolina , we estimateChina's ban on product fromNorth Carolina will be lifted duringSeptember 2022 . During fiscal 2021, we sold 444.1 million pounds of product to customers inMexico at a gross sales value of approximately$228.3 million , and we sold 91.8 million pounds of product to customers inChina at a gross sales value of approximately$121.7 million . Due to the brief duration ofMexico's ban on imports fromTexas andNorth Carolina and because our geographic footprint allowed us to export product toMexico from other states in which we operate,Mexico's ban did not have a material effect on our results. The primary products we export toChina are chicken paws and wing tips. Because there are no material domestic or export markets for these products other thanChina , we are forced to render those products for significantly lower returns while our exports toChina from a particular state are banned. Based on actual market prices, we estimateChina's ban cost the Company$5.0 million , net of taxes, during the second quarter of fiscal 2022, and we estimate the ban will continue to adversely affect our results by approximately$0.8 million per week, net of taxes, as long as the ban remains in effect. Our higher average cost of goods sold during the second quarter of fiscal 2022 as compared to the same period a year ago reflects increases in both non-feed related costs of goods sold, details of which are described in the "Results of Operations" section below, and in feed costs per pound of chicken processed. The average cash prices paid by the Company for grain were significantly higher during the second quarter of fiscal 2022 as compared to the second quarter of fiscal 2021, which contributed to an increase in feed costs in broiler flocks processed.Russia's invasion ofUkraine makes it likely that Ukrainian farmers will be unable or unwilling to plant a significant number of acres that would normally be planted with corn and wheat, and sanctions imposed onRussia as a result of the war are also limitingRussia's ability to export certain crop inputs, such as fertilizer, to other parts of the world. Those uncertainties, along with a slow start tothe United States planting season due to cold, wet weather, have caused volatility and rising prices for corn and soybean meal. Additionally, final South American soybean crop production is expected to be much lower than normal due to drought conditions experienced during most of the growing season, which is adding further upward pressure to soybean meal prices. Finally, theUSDA's planting intentions report released onMarch 31, 2022 , estimated thatUnited States farmers will plant 89.5 million acres of corn in 2022, a 4.2% decrease from the 93.4 million acres planted in 2021. This reduction in acreage, coupled with already tight world corn stocks, has placed further upward pressure on corn prices. 20
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The Company has priced very little of its grain needs pastMay 2022 . Had we priced our remaining fiscal 2022 needs atMay 25, 2022 cash market prices quoted on theChicago Board of Trade , we estimate our costs of feed grains based on fiscal 2021 volumes would be approximately$208.3 million higher during fiscal 2022 as compared to fiscal 2021. Based on our estimated production levels for fiscal 2022, we estimate that higher grain costs, along with estimated basis costs, would result in approximately$0.0372 per pound higher feed costs in broiler flocks processed for fiscal 2022 as compared to fiscal 2021. These numbers are estimates and are subject to change as we move through the balance of the year and as grain prices and actual production levels fluctuate. We processed 1.23 billion pounds of dressed poultry during the second fiscal quarter of 2022, up 0.3% from the 1.22 billion pounds processed during the second fiscal quarter of 2021. The slight increase in pounds processed resulted from improved yields, partially offset by a slight reduction in the number of head processed. Our average live weights of birds processed were relatively flat during the two periods. We reduced production at our plants processing a larger bird for food service customers at the onset of the pandemic in response to reduced demand and labor and logistical challenges. As pandemic conditions have continued to subside, we remain on a path to return to full production. We now estimate we will process 1.28 billion pounds of dressed poultry during the third quarter of fiscal 2022 and 1.30 billion pounds during the fourth quarter of fiscal 2022. These are estimates, and actual results could change based on weather, production decisions, bird weights and market conditions. Based on actual production through the first half of fiscal 2022 and the estimates for the second half, we estimated that we will produce 5.01 billion pounds of dressed poultry during the year, which would represent a 3.2% increase compared to the 4.86 billion pounds produced during fiscal 2021. While demand for our retail grocery products and demand from our food service distribution customers continues to be favorable, resulting in selling prices for our products that are more than offsetting the higher prices we are paying for feed grains and other costs, it is uncertain how long these conditions will persist. How long current conditions will last will depend on many factors, including: •the extent to which resurgences in COVID-19 infections make people fearful of dining out or cause state, local and foreign governments to extend or reimpose stay-at-home restrictions, as well as varying restrictions on restaurants; •the extent to which inflationary conditions affect the amount of disposable income consumers have to spend on food and how consumers allocate their food dollars;
•the persistence of supply constraints in the
•with respect to our export sales, the condition of the oil market, the relative
strength of foreign currencies against the
•the effect of the pandemic on our operations, including labor shortages we have experienced at various times throughout the pandemic and could continue to experience as a result of the pandemic;
•with respect to feed grain prices, the quality and quantity of the 2022 corn and soybean crops worldwide; and
•the duration and effect of the war in
RESULTS OF OPERATIONS
Net sales for the second quarter endedApril 30, 2022 were$1,539.7 million as compared to$1,133.9 million for the second quarter endedApril 30, 2021 , an increase of$405.8 million , or 35.8%. Net sales of poultry products for the second quarter endedApril 30, 2022 and 2021, were$1,464.0 million and$1,087.2 million , respectively, an increase of$376.8 million , or 34.7%. The increase in net sales of poultry products resulted from a 32.9% increase in the average sales price of poultry products sold and a 1.4% increase in the pounds of poultry products sold, each of which is primarily the result of improved demand from food service customers and supply constraints, as discussed in the Executive Overview above. During the second quarter of fiscal 2022, the Company sold 1.22 billion pounds of poultry products, up from 1.20 billion pounds during the second quarter of fiscal 2021. Overall, quoted market prices for poultry products increased during the second quarter of fiscal 2022 as compared to the same quarter of fiscal 2021. When compared to the second quarter of fiscal 2021,Urner Barry average market prices for boneless breast meat, boneless thigh meat and tenders increased by 85.2%, 58.6% and 47.5%, respectively, whileUrner Barry average market prices for leg quarters and jumbo wings decreased by 0.6% and 19.8%, respectively. Average realized prices for chicken products sold to retail grocery store customers increased by 13.1% during the second quarter of fiscal 2022 as compared to the same period of fiscal 2021, and retail grocery store demand remains strong. 21
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Net sales of prepared chicken products for the quarters endedApril 30, 2022 and 2021 were$75.7 million and$46.6 million , respectively, an increase of 62.3%. This increase is primarily attributable to a 39.9% increase in the average sales price of prepared chicken products sold and a 16.1% increase in the pounds of prepared chicken products sold. The increase in pounds and sales price of prepared chicken products was primarily the result of improved demand from our food service customers. During the second quarter of fiscal 2022, the Company sold 28.4 million pounds of prepared chicken products, up from 24.5 million pounds during the second quarter of fiscal 2021. Net sales for the six months endedApril 30, 2022 were$2,867.1 million as compared to$2,043.2 million for the six months endedApril 30, 2021 , an increase of$824.0 million , or 40.3%. Net sales of poultry products for the six months endedApril 30, 2022 and 2021 were$2,727.1 million and$1,957.5 million , respectively, an increase of$769.6 million , or 39.3%. The increase in net sales of poultry products resulted from a 36.2% increase in the average sales price of poultry products sold and a 2.3% increase in the pounds of poultry products sold. During the first six months of fiscal 2022, the Company sold 2,404.8 million pounds of poultry products, up from 2,350.6 million pounds during the first six months of fiscal 2021. This increase in pounds of poultry products sold is primarily the result of an increase of 1.9% in the number of head processed. Overall, quoted market prices for poultry products increased during the first six months of fiscal 2022 as compared to the same period of fiscal 2021. When compared to the first six months of fiscal 2021,Urner Barry average market prices for boneless thigh meat, boneless breast meat, tenders and leg quarters increased by 102.5%, 93.5%, 54.5% and 11.3%, respectively, whileUrner Barry average market prices for jumbo wings decreased by 0.2%. Average realized prices for chicken products sold to retail grocery store customers increased by 10.1% during the first six months of fiscal 2022 as compared to the same period of fiscal 2021, and retail grocery store demand remains strong. Net sales of prepared chicken products for the six months endedApril 30, 2022 and 2021 were$140.1 million and$85.7 million , respectively, an increase of 63.4%. This increase is primarily attributable to a 26.4% increase in the average sales price of prepared chicken products sold and a 29.2% increase in the pounds of prepared chicken products sold. The increase in pounds and sales price of prepared chicken products was primarily the result of improved demand from our food service customers. During the first six months of fiscal 2022, the Company sold 59.0 million pounds of prepared chicken products, up from 45.7 million pounds during the first six months of fiscal 2021. Cost of sales for the second quarter of fiscal 2022 was$1,051.8 million as compared to$941.9 million during the second quarter of fiscal 2021, an increase of$109.9 million , or 11.7%. Cost of sales of poultry products during the second quarter of fiscal 2022, as compared to the second quarter of fiscal 2021, was$963.6 million and$893.1 million , respectively, which represents a 6.5% increase in the average cost of sales per pound of poultry products. As illustrated in the table below, which for comparative purposes includes poultry products transferred to the Company's prepared chicken plant, the increase in the cost of sales per pound of poultry products resulted from an increase in the cost of feed per pound of broilers processed of$0.0449 , or 14.1%, and a$0.0184 per pound increase, or 4.2%, in other costs of sales of poultry products. Poultry Cost of Sales (In thousands, except per pound data) Three Months Ended Three Months Ended April 30, 2022 April 30, 2021 Incr/(Decr) Description Dollars Per lb. Dollars Per lb. Dollars Per lb. Beginning Inventory$ 42,912 $ 0.5488 $ 30,596 $ 0.4985 $ 12,316 $ 0.0503 Feed in broilers processed 443,581 0.3631 388,976 0.3182 54,605 0.0449 All other cost of sales 556,400 0.4554 534,152 0.4370 22,248 0.0184 Less: Ending Inventory 38,696 0.5681 41,645 0.5838 (2,949) (0.0157) Total poultry cost of sales$ 1,004,197 (1)$ 0.8152 $ 912,079 (1)$ 0.7523 $ 92,118 $ 0.0629 Pounds: Beginning Inventory 78,191 61,374 Poultry processed/other 1,221,815 1,222,279 Poultry sold 1,231,897 (1) 1,212,315 (1) Ending Inventory 68,110 71,338
Note (1) - For comparative purposes, includes the costs and pounds of product sold to the Company's prepared chicken plant.
Other costs of sales of poultry products consists primarily of labor, packaging, freight, maintenance and repairs, utilities, antimicrobial interventions, contract grower pay, chick costs and certain fixed costs. Collectively, these non-feed related costs of poultry products sold increased by$0.0184 per pound processed, or 4.2%, during this year's second fiscal quarter compared to the same quarter a year ago. The second quarter of fiscal 2022 includes a benefit of approximately$4.2 million for insurance proceeds received as a result of the winter storms of 2021. Conversely, the second quarter of fiscal 2021 includes approximately 22
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$13.7 million in direct expenses incurred as a result of the winter storms. Excluding the effects of the proceeds and expenses directly related to the winter storms, other costs of sales of poultry products would have increased by$0.0331 per pound processed, or 7.8%, primarily attributable to higher labor and packaging costs in our processing facilities, higher freight costs incurred for the delivery of finished product, and higher chick costs. COVID-19-related expenses included in other costs of sales of poultry products during the second quarter of fiscal 2022 total approximately$0.4 million . By comparison, COVID-19-related expenses in other costs of sales of poultry products during the second quarter of fiscal 2021 totaled$3.7 million . Cost of sales of the Company's prepared chicken products during the second quarter of fiscal 2022 were$88.3 million as compared to$48.8 million during the same quarter a year ago, an increase of$39.5 million , or 80.9%. This increase was attributable to a 16.1% increase in the pounds of prepared chicken sold, resulting from improved customer demand, and significantly higher costs for the fresh chicken purchased by the plant. Cost of sales for the first six months of fiscal 2022 was$2,059.9 million as compared to$1,781.3 million during the first six months of fiscal 2021, an increase of$278.6 million , or 15.6%. Cost of sales of poultry products during the first six months of fiscal 2022, as compared to the first six months of fiscal 2021, was$1,892.4 million and$1,695.5 million , respectively, which represents a 9.1% increase in the average cost of sales per pound of poultry products. As illustrated in the table below, which for comparative purposes includes poultry products sold to the Company's prepared chicken plant, the increase in the cost of sales per pound of poultry products resulted from an increase in the cost of feed per pound of broilers processed of$0.0544 , or 18.7%, and a$0.0232 per pound, or 5.3%, increase in other costs of sales of poultry products. Poultry Cost of Sales (In thousands, except per pound data) Six Months Ended Six Months Ended April 30, 2022 April 30, 2021 Incr/(Decr) Description Dollars Per lb. Dollars Per lb. Dollars Per lb. Beginning Inventory$ 42,775 $ 0.5646 $ 32,952 $ 0.4701 $ 9,823 $ 0.0945 Feed in broilers processed 840,016 0.3459 692,023 0.2915 147,993 0.0544 All other cost of sales 1,122,253 0.4622 1,042,378 0.4390 79,875 0.0232 Less: Ending Inventory 38,696 0.5681 41,645 0.5838 (2,949) (0.0157) Total poultry cost of sales$ 1,966,348 (1)$ 0.8073 $ 1,725,708 (1)$ 0.7272 $ 240,640 $ 0.0801 Pounds: Beginning Inventory 75,757 70,103 Poultry processed/other 2,428,182 2,374,195 Poultry sold 2,435,830 (1) 2,372,961 (1) Ending Inventory 68,110 71,338
Note (1) - For comparative purposes, includes the costs and pounds of product sold to the Company's prepared chicken plant.
Other costs of sales of poultry products consists primarily of labor, packaging, freight, maintenance and repairs, utilities, antimicrobial interventions, contract grower pay, chick costs and certain fixed costs. Collectively, these non-feed related costs of poultry products sold increased by$0.0232 per pound processed, or 5.3%, during the first six months of fiscal 2022, as compared to the same period a year ago. The first half of fiscal 2022 includes a benefit of approximately$7.4 million for insurance proceeds received as a result of the winter storms of 2021. Conversely, the first half of fiscal 2021 includes approximately$13.7 million in direct expenses incurred as a result of the winter storms. Excluding the effects of the proceeds and expenses directly related to the winter storms, other costs of sales of poultry products would have increased by$0.0320 per pound processed, or 7.4%, primarily attributable to higher labor and packaging costs in our processing facilities, higher freight costs incurred for the delivery of finished product, and higher chick costs. These increases were partially offset by lower COVID-19-related expenses included in other costs of sales of poultry products, which totaled$2.0 million during the first six months of fiscal 2022, as compared to$9.0 million during the first six months of fiscal 2021. Cost of sales of the Company's prepared chicken products during the first six months of fiscal 2022 was$167.5 million as compared to$85.8 million during the same period a year ago, an increase of$81.7 million , or 95.3%. This increase was primarily attributable to a 29.2% increase in the pounds of prepared chicken sold, resulting from improved customer demand, and significantly higher costs for the fresh chicken purchased by the plant. The Company recorded the value of live broiler inventories on hand atApril 30, 2022 andOctober 31, 2021 at cost. In periods when the Company estimates that the cost to grow live birds in inventory to a marketable age and then process and distribute those birds will be lower in the aggregate than the anticipated sales proceeds, the Company values the broiler inventories on hand at cost and accumulates costs as the birds are grown to a marketable age subsequent to the balance sheet 23
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date. In periods when the Company estimates those costs will be higher in the aggregate than the anticipated sales proceeds, the Company will make an adjustment to reduce the value of live birds in inventory to the net realizable value. No such adjustment was required atApril 30, 2022 orApril 30, 2021 . Selling, general and administrative ("SG&A") costs during the second quarter of fiscal 2022 were$66.4 million , an increase of$2.1 million compared to the$64.2 million during the second quarter of fiscal 2021. SG&A costs during the six months endedApril 30, 2022 were$132.1 million , an increase of$11.3 million compared to the$120.8 million during the six months endedApril 30, 2021 . The following tables include the components of SG&A costs for the three and six months endedApril 30, 2022 and 2021. Selling, General and Administrative Costs (in thousands) Three Months Three Months Ended Ended Description April 30, 2022 April 30, 2021 Increase/(Decrease) Stock compensation expense$ 8,245 $ 2,776 $ 5,469 Fees and expenses related to the pending merger 4,748 - 4,748 Administrative salaries 13,381 12,806 575 Legal expense 9,506 9,137 369 Sanderson Farms Championship expense 2,207 1,953 254 Broker commissions 3,058 3,302 (244) Trainee expense 2,532 3,095 (563) Advertising expense 2,093 2,787 (694) COVID-19-related expense 2,708 4,927 (2,219) ESOP expense - 6,500 (6,500) All other SG&A 17,904 16,962 942 Total SG&A$ 66,382 $ 64,245 $ 2,137 Selling, General and Administrative Costs (in thousands) Six Months Ended
Six Months Ended
Description April 30, 2022 April 30, 2021 Increase/(Decrease)
Stock compensation expense $ 16,463 $ 5,178 $ 11,285
Fees and expenses related to the pending
merger 5,528 - 5,528
Legal expense 20,979 17,601 3,378
Administrative salaries 26,280 25,163 1,117
Sanderson Farms Championship expense 4,414 3,903 511
Broker commissions 6,529 6,596 (67)
Trainee expense 5,044 6,081 (1,037)
Advertising expense 4,220 5,494 (1,274)
COVID-19-related expense 7,875 11,089 (3,214)
ESOP expense - 6,500 (6,500)
All other SG&A 34,788 33,239 1,549
Total SG&A $ 132,120 $ 120,844 $ 11,276
Regarding both tables above, the increases in stock-based compensation expense
are primarily attributable to the timing of accruals related to the Company's
performance share agreements with key employees, as described in "Part I, Item
1, Note 5 - Stock Compensation Plans" of this Form 10-Q. The increases in
merger-related fees and expenses are the result of various expenses incurred to
date related to the Company's entry into a definitive agreement on August 8,
2021 to be acquired by a joint venture between Cargill, Incorporated and
Continental Grain Company (the "Merger Agreement"). The increases in legal
expense are primarily attributable to our ongoing defense of the litigation
described in "Part I, Item 1, Note 7 - Commitments and Contingencies" of this
Form 10-Q. The increases in all other SG&A expenses are primarily the result of
travel and entertainment expenses returning to a more normal level during fiscal
2022, as compared to fiscal 2021, when a substantial
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portion of business travel was halted due to the pandemic. The decreases in ESOP expense are due to the fact that we are unable to make an ESOP contribution during fiscal 2022 under the terms of the Merger Agreement.
The Company's operating income for the three and six months endedApril 30, 2022 was$421.5 million and$675.1 million , respectively, as compared to operating income for the three and six months endedApril 30, 2021 of$127.7 million and$141.1 million , respectively. The improvement in operating results for the period endedApril 30, 2022 , as compared to the same period a year ago, resulted primarily from significantly higher average selling prices, partially offset by higher average costs of goods sold. Interest expense during the second quarter and first half of fiscal 2022 was$0.6 million and$1.1 million , respectively, as compared to$0.7 million and$1.3 million , respectively, during the second quarter and first half of fiscal 2021. The Company's estimated annual effective tax rates for the three and six months endedApril 30, 2022 were 23.7% and 23.8%, respectively, as compared to estimated annual effective tax rates of 23.7% and 23.9%, respectively, for the three and six months endedApril 30, 2021 . There were no significant discrete items recognized during any of the comparative periods. The Company estimates its effective tax rate for the full fiscal year 2022, exclusive of discrete items, will be approximately 23.8%. As ofApril 30, 2022 , the Company's deferred income tax liability was$155.8 million as compared to$156.5 million atOctober 31, 2021 , a decrease of$0.8 million . During the three and six months endedApril 30, 2022 , the Company's net income was$321.2 million , or$14.39 per share, and$514.0 million , or$23.03 per share, respectively. For the three and six months endedApril 30, 2021 , the Company's net income was$96.9 million , or$4.34 per share, and$106.4 million , or$4.76 per share, respectively. The increase in net income for the comparative periods is primarily attributable to significantly higher average selling prices, partially offset by higher average costs of goods sold. Details related to each of the aforementioned drivers of the changes in net income have been discussed above.
Liquidity and Capital Resources
The Company's working capital, calculated by subtracting current liabilities from current assets, atApril 30, 2022 was$1,303.5 million , and its current ratio, calculated by dividing current assets by current liabilities, was 5.5 to 1. The Company's working capital and current ratio atOctober 31, 2021 were$777.2 million and 3.5 to 1, respectively. These measures reflect the Company's ability to meet its short-term obligations and are included here as a measure of the Company's short-term market liquidity. The Company's principal sources of liquidity during fiscal 2022 include cash on hand atOctober 31, 2021 , cash flows from operations, and funds available under the Company's revolving credit facility. As described below, the Company is a party to a revolving credit facility datedApril 23, 2021 , with a maximum available borrowing capacity of$1.0 billion . As ofApril 30, 2022 andMay 25, 2022 , the Company had no outstanding draws under the facility, and had approximately$29.1 million outstanding in letters of credit, leaving$970.9 million of borrowing capacity available under the facility. Management believes the Company has sufficient liquidity available to meet its needs. The Company's cash position atApril 30, 2022 andOctober 31, 2021 consisted of$829.1 million and$439.3 million , respectively, in cash and short-term cash investments. The Company's ability to invest cash is limited by covenants in its revolving credit agreement to short-term investments. All of the Company's cash atApril 30, 2022 andOctober 31, 2021 was held in bank accounts or highly-liquid investment accounts. There were no restrictions on the Company's access to its cash, and such cash was available to the Company on demand to fund its operations. Cash flows provided by operating activities during the six months endedApril 30, 2022 totaled$474.9 million , as compared to cash flows provided by operating activities of$143.6 million during the six months endedApril 30, 2021 , an increase of$331.3 million . During the first six months of fiscal 2022, the Company realized higher margins due to higher average selling prices, partially offset by higher average costs of goods sold, as compared to the first six months of fiscal 2021. This increase in cash flows was partially offset by an increase in inventories, especially our live bird and feed inventories, during the first six months of fiscal 2022. The increase in inventories is primarily the result of significantly higher prices paid for corn and soybean meal, our primary feed ingredients, during the first six months of fiscal 2022 as compared to the same period in fiscal 2021. Details related to the corn and soy markets are discussed above in the Executive Overview of Results section. The increase in cash flows between the two periods was further offset by outflows for cash bonuses paid duringDecember 2021 . These bonus payments totaled approximately$55.9 million , compared to no such payout during the first six months of fiscal 2021. Cash flows used in investing activities during the first six months of fiscal 2022 and 2021 were$72.9 million and$85.9 million , respectively. The Company's capital expenditures during the first six months of fiscal 2022 were approximately$73.1 million , and included approximately$13.9 million for multiple large-scale equipment and building upgrades at multiple complexes and approximately$2.1 million to purchase new vehicles that would have been leased prior to fiscal 2020. Capital expenditures for the first six months of fiscal 2021 were$86.3 million , and included approximately$22.1 million for multiple 25
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large-scale equipment and building upgrades at multiple complexes,$6.6 million to purchase new vehicles and$9.8 million on construction of a new hatchery inJones County, Mississippi . Cash flows used in financing activities during the six months endedApril 30, 2022 totaled$12.2 million , as compared to cash flows provided by financing activities of$16.2 million during the six months endedApril 30, 2021 . The change in cash flows from financing activities is primarily attributable to the change in outstanding borrowings under the Company's revolving credit facility. During the six months endedApril 30, 2022 , the Company's outstanding borrowings remained unchanged, as compared to an increase in outstanding borrowings of$30.0 million under the facility during the six months endedApril 30, 2021 . As ofMay 13, 2022 , the Company's fiscal 2022 capital budget is approximately$221.4 million . The Company expects the 2022 capital budget to be funded by cash on hand, internally generated working capital and cash flows from operations. The fiscal 2022 capital budget includes an aggregate of approximately$68.2 million for multiple large-scale equipment and building upgrades at multiple complexes and$20.3 million to purchase new vehicles that would have been leased prior to fiscal 2020. Excluding the budgeted amounts for the items detailed above, the fiscal 2022 capital budget is approximately$132.9 million . These amounts are estimates and are subject to change as we move through the remainder of fiscal 2022. OnOctober 2, 2020 , the Company filed a shelf registration statement on Form S-3 to register for possible future sale shares of the Company's common and/or preferred stock. An indeterminate amount of common stock and preferred stock may be offered by the Company in amounts, at prices and on terms to be determined by the board of directors if and when shares are issued. The registration statement became automatically effective upon filing with theSEC onOctober 2, 2020 . The Company regularly evaluates both internal and external growth opportunities, including acquisition opportunities and the possible construction of new production assets, and conducts due diligence activities in connection with such opportunities. The cost and terms of any financing to be raised in conjunction with any growth opportunity, including the Company's ability to raise debt or equity capital on terms and at costs satisfactory to the Company, and the effect of such opportunities on the Company's balance sheet, are critical considerations in any such evaluation. Covenants in the pending Merger Agreement to which the Company is a party limit the Company's ability to pursue any strategy outside the ordinary course of business.
Revolving Credit Facility
The Company is a party to a revolving credit facility datedApril 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 atApril 30, 2022 , was$1.5 billion . The credit is unsecured and, unless extended, will expire onApril 23, 2026 . As ofApril 30, 2022 andMay 25, 2022 , the Company had no outstanding draws under the facility and had approximately$29.1 million outstanding in letters of credit, leaving$970.9 million of borrowing capacity available under the facility. For more information about the facility, see Item 1.01 of our Current Report on Form 8-K filedApril 28, 2021 .
Critical Accounting Estimates
We consider accounting policies related to allowance for doubtful accounts, inventories, long-lived assets, accrued self-insurance, performance share plans, income taxes and contingencies to be critical accounting estimates. These policies are summarized in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedOctober 31, 2021 . New Accounting Pronouncements InDecember 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 afterDecember 15, 2020 , our fiscal 2022. We adopted this guidance during the first quarter of fiscal 2022, and adoption did not materially affect our consolidated financial statements. InMarch 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 applyingU.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 onMarch 12, 2020 , and can be applied through 26
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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 throughDecember 31, 2022 . 27
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