Significant Accounting Policies (Policies)

12 Months Ended

Oct. 31, 2013

Principles of Consolidation: The consolidated financial statements include the accounts of Sanderson Farms, Inc. (the “Company”) and its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.

Business

Business: The Company is engaged in the production, processing, marketing and distribution of fresh and frozen chicken and other prepared chicken items. The Company’s net sales and cost of sales are significantly affected by market price fluctuations of its principal products sold and of its principal feed ingredients, corn and other grains.

The Company sells to retailers, distributors and casual dining operators primarily in the southeastern, southwestern, northeastern and western United States. Management periodically performs credit evaluations of its customers’ financial condition and generally does not require collateral. One customer accounted for more than 10% of consolidated sales for each of the years ended October 31, 2013, 2012 and 2011. Sales to that customer accounted for 14.2%, 13.0%, and 10.6% of the Company’s consolidated net sales in fiscal 2013, 2012, and 2011, respectively. Shipping and handling costs are included as a component of cost of sales.

Generally, revenue is recognized in connection with a transaction when the Company has agreed to sell, and our customer has agreed to purchase, a specific quantity of product, when delivery has occurred, when the price to the buyer has been fixed, and when collectability is reasonably assured. For most customers, this occurs when the product is delivered to customers, which for domestic sales usually occurs at the time of shipment. Revenue on certain international sales is recognized upon transfer of title, which may occur after shipment. Revenue is recognized as the net amount estimated to be received after deducting estimated amounts for discounts, cooperative advertising allowances, product terms and other items.

RECONCILIATION OF GROSS SALES TO NET SALES DOLLARS (in millions)


Product Category	Description	Fiscal Year 2013			Fiscal Year 2012			Fiscal Year 2011
Fresh Ice Packed Chicken	Gross Sales	$	367.4		$	308.4		$	263.9
	Commissions		(4.1	)		(4.3	)		(3.9	)
	Sales and Customer Allowances		(11.2	)		(9.8	)		(8.5	)
	Other ⁽¹⁾		(9.8	)		(6.9	)		(5.3	)

	Net Sales		342.3			287.4			246.2


Chill Pack Chicken	Gross Sales		955.0			821.3			670.1
	Commissions		(6.5	)		(6.8	)		(6.0	)
	Sales and Customer Allowances		(9.5	)		(10.2	)		(8.5	)
	Other ⁽¹⁾		(6.3	)		(5.2	)		(3.2	)

	Net Sales		932.7			799.1			652.4


Frozen Chicken	Gross Sales		282.0			314.1			272.0
	Commissions		(0.2	)		(0.1	)		(0.0	)
	Sales and Customer Allowances		(0.0	)		(0.3	)		(0.0	)
	Other ⁽¹⁾		(0.8	)		(0.8	)		(1.8	)

	Net Sales		281.0			312.9			270.2


Fresh Vacuum Sealed Chicken	Gross Sales		1,009.6			875.7			690.8
	Commissions		(1.8	)		(1.9	)		(1.8	)
	Sales and Customer Allowances		(8.3	)		(6.4	)		(6.0	)
	Other ⁽¹⁾		(7.5	)		(5.1	)		(4.0	)

	Net Sales		992.0			862.3			679.0


Partially Cooked Chicken	Gross Sales		98.3			90.4			107.9
	Commissions		(0.8	)		(0.8	)		(1.0	)
	Sales and Customer Allowances		(0.4	)		(0.4	)		(0.4	)
	Other ⁽¹⁾		(0.2	)		(0.1	)		(0.1	)

	Net Sales		96.9			89.1			106.4


Mechanically Deboned Chicken	Gross Sales		38.1			35.3			23.9
	Commissions		(0.0	)		(0.0	)		(0.0	)
	Sales and Customer Allowances		(0.0	)		(0.0	)		(0.0	)
	Other ⁽¹⁾		(0.0	)		(0.0	)		(0.0	)

	Net Sales		38.1			35.3			23.9


Totals	Gross Sales		2,750.4			2,445.2			2,028.6
	Commissions		(13.4	)		(13.9	)		(12.7	)
	Sales and Customer Allowances		(29.4	)		(27.1	)		(23.4	)
	Other ⁽¹⁾		(24.6	)		(18.1	)		(14.4	)

	Net Sales	$	2,683.0		$	2,386.1		$	1,978.1

⁽¹⁾	Other deductions include short weights, credit memos, rebates and other items, none of which, individually, is material.

Sales of offal to rendering companies are considered by-products; accordingly, these amounts reduce cost of sales and totaled $47.6 million, $43.1 million and $35.4 million in fiscal 2013, 2012 and 2011, respectively.

The Company sells certain of its products either directly to foreign markets or to U.S. based customers who resell the product in foreign markets. These foreign markets are primarily Russia, Eastern Europe, China, Mexico and the Caribbean. These export sales for fiscal years 2013, 2012 and 2011 totaled approximately $292.6 million, $318.7 million and $253.8 million, respectively. The Company does not believe that the amount of sales attributable to any single foreign country is material to its total sales during any of the periods presented. The Company’s export sales are facilitated through independent food brokers located in the United States and the Company’s internal sales staff.

Use of Estimates

Use of Estimates: The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash Equivalents

Cash Equivalents: The Company considers all highly liquid investments with maturities of ninety days or less when purchased to be cash equivalents.

Allowance for Doubtful Accounts

Allowance for Doubtful Accounts: In the normal course of business, the Company extends credit to its customers on a short-term basis. Although credit risks associated with our customers are considered minimal, the Company routinely reviews its accounts receivable balances and makes provisions for probable doubtful accounts based on an individual assessment of a customer’s credit quality as well as subjective factors and trends, including the aging of receivable balances. In circumstances where management is aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve is recorded to reduce the receivable to the amount expected to be collected. If circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligations to us), our estimates of the recoverability of amounts due us could be reduced by a material amount and the allowance for doubtful accounts and related bad debt expense would increase by the same amount.

Inventories

Inventories: Processed and prepared inventories and inventories of feed, eggs, medication and packaging supplies are stated at the lower of cost (first-in, first-out method) or market value.

Live poultry inventories of broilers are stated at the lower of cost or market value and breeders at cost less accumulated amortization. The costs associated with breeders, including breeder chicks, feed, medicine and grower pay, are accumulated up to the production stage and amortized over nine months using the straight-line method.

When the projected cost to complete, process and sell broilers exceeds the expected market value for the finished product, the Company reduces the value of live inventories from cost to market.

Property, Plant and Equipment

Property, Plant and Equipment: Property, plant and equipment is stated at cost. Depreciation of property, plant and equipment is provided by the straight-line method over the estimated useful lives of 15 to 39 years for buildings and 3 to 12 years for machinery and equipment. During fiscal 2013 and 2011, the Company capitalized interest of $75,000 and $630,000, respectively, to the new complexes under construction at the time in Palestine, Texas and Kinston, North Carolina. With the absence of a major construction project, the Company did not capitalize any interest during fiscal 2012.

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets: The Company continually reevaluates the carrying value of its long-lived assets based on events or changes in circumstances which indicate that the carrying value may not be recoverable. As part of this reevaluation and when indicators are present, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposal. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss, based on the fair value of the assets, is recognized through a charge to operations.

Self-Insurance Programs

Self-Insurance Programs: Insurance expense for workers’ compensation benefits and employee-related health care benefits are estimated using historical experience and actuarial estimates. The Company accrues expenses in its workers’ compensation and employee benefit plans for both known claims as well as claims incurred but not reported. Stop-loss coverage is maintained with third party insurers to limit the Company’s total exposure. Management regularly reviews the assumptions used to recognize periodic expenses. Any resulting adjustments to accrued claims are reflected in current operating results. There are no material adjustments to expenses accrued in prior periods in current expenses. If historical experience proves not to be a good indicator of future expenses, if management were to use different actuarial assumptions, or if there is a negative trend in the Company’s claims history, there could be a significant increase or decrease in cost of sales depending on whether these expenses increased or decreased, respectively.

Advertising and Marketing Costs

Advertising and Marketing Costs: The Company expenses advertising costs as incurred. Advertising costs are included in selling, general and administrative expenses and totaled $3,340,000, $1,268,000 and $875,000 for fiscal 2013, 2012 and 2011, respectively.

Income Taxes

Income Taxes: Deferred income taxes are accounted for using the liability method and relate principally to depreciation expense, stock based compensation programs and self-insurance programs accounted for differently for financial and income tax purposes.

Valuation allowances are recorded when it is more likely than not some or all of a deferred tax asset will not be realized.

The Company is periodically audited by taxing authorities and considers any adjustments, interest, and penalties incurred as a result of the audits in computing income tax expense. Any audit adjustments affecting permanent differences could have an impact on the Company’s effective tax rate. Tax periods for fiscal years 2009 through 2013 remain open to examination by federal and state taxing jurisdictions to which the Company is subject.

Share-Based Compensation

Share-Based Compensation: The Company accounts for all share-based payments to employees, including grants of employee stock options, restricted stock and performance-based shares in the income statement based on their fair values. For performance-based shares, the Company recognizes expense when management determines the performance criteria are probable of being met.

Earnings Per Share

Earnings Per Share: Basic earnings per share is based upon the weighted average number of common shares outstanding during the year. Share-based payment awards entitling holders to receive non-forfeitable dividends before vesting are considered participating securities and thus included in the calculation of basic earnings per share. 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 outstanding shares. Diluted earnings per share includes any dilutive effects of options, warrants, restricted stock and convertible securities.

Fair Value of Financial Instruments

Fair Value of Financial Instruments: The Company holds certain items that are required to be disclosed at fair value, primarily cash equivalents representing overnight investments and 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.

At October 31, 2013 and 2012, the fair value of the Company’s cash and short-term cash investments of approximately $85.6 million and $27.8 million, respectively, approximated their carrying value due to the short maturity of these financial instruments and were categorized as a Level 2 measurement. Inputs used to measure fair value were primarily recent trading prices and prevailing market interest rates.

Fair values for debt are based on quoted market prices or published forward interest rate curves and were categorized as Level 2 measurements. The fair value and carrying value of the Company’s borrowings under its credit facilities, long-term debt and capital lease obligations were as follows (in millions):


	October 31, 2013				October 31, 2012
	Fair Value		Carrying Value		Fair Value		Carrying Value
Total Debt (In millions)	$	43	$	40	$	163	$	161

Reclassifications

Reclassifications: The Company has made reclassifications to prior year financial statements to conform with the presentation for the current year financial statements. The reclassifications are for consistency of presentation and do not affect previously reported net income (loss), stockholders’ equity or total assets.

Impact of Recently Issued Accounting Standards

Impact of Recently Issued Accounting Standards: In May 2011, FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS”. The amendments in this update generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS. This update is effective for annual and interim periods beginning after December 15, 2011, and was adopted in the three month period ending January 31, 2013. This update did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.