Stock Compensation Plans

12 Months Ended

Oct. 31, 2019

Share-based Payment Arrangement [Abstract]

On February 17, 2005, the shareholders of the Company approved the Sanderson Farms, Inc. and Affiliates Stock Incentive Plan (the “Plan”). The Plan allows the Company’s Board of Directors to grant certain incentive awards including stock options, stock appreciation rights, restricted stock, and other similar awards. The Company was authorized to award up to 2,250,000 shares under the Plan. On February 17, 2011, the shareholders approved changes to the plan to increase the shares that may be issued under the plan from 2,250,000 to 3,500,000 shares and to increase the number of shares that may be granted in the form of restricted stock from 562,500 to 1,562,500 shares. On February 11, 2016, the shareholders approved the authorization of an additional 700,000 shares issuable under the plan, for a total of 4,200,000 authorized shares. The shareholders also approved an increase in the number of shares issuable as restricted stock from 1,562,500 to 2,112,500 shares.

Pursuant to the Plan, the Company’s Board of Directors approves agreements for the issuance of restricted stock to directors, executive officers and other key employees. Restricted stock granted in fiscal 2019, 2018 and 2017, vests three to four years from the date of grant. The vesting schedule is accelerated upon death, disability, the participant’s termination of employment after reaching retirement eligibility by reason of retirement, or upon a change in control, as defined in the Plan. Restricted stock grants are valued based upon the closing market price of the Company’s common stock on the date of grant and are recognized as compensation expense over the vesting period. Compensation expense related to restricted stock grants totaled $8.4 million, $7.5 million and $7.4 million during fiscal 2019, 2018 and 2017, respectively.

A summary of the Company’s restricted stock activity and related information is as follows:


	Number of Shares	Weighted Average Grant Price
Outstanding at October 31, 2016	293,810	$	68.65
Granted during fiscal 2017	83,587	$	91.71
Vested during 2017	(69,294)	$	55.50
Forfeited during 2017	(6,874)	$	78.22
Outstanding at October 31, 2017	301,229	$	77.86
Granted during fiscal 2018	65,250	$	145.33
Vested during 2018	(84,696)	$	68.82
Forfeited during 2018	(2,352)	$	108.31
Outstanding at October 31, 2018	279,431	$	96.10
Granted during fiscal 2019	88,334	$	105.01
Vested during 2019	(77,031)	$	88.37
Forfeited during 2019	(6,464)	$	104.95
Outstanding at October 31, 2019	284,270	$	100.76

The Company had $12.5 million in unrecognized share-based compensation costs related to the 284,270 unvested shares as of October 31, 2019, that will be recognized over a weighted average period of 1 year, 6 months.

Also pursuant to the Plan, the Company’s Board of Directors approves Management Share Purchase Plan agreements (the “Purchase Plan”) that authorize the issuance of shares of restricted stock to the Company’s directors, executive officers and other key employees. Pursuant to the Purchase Plan, non-employee directors may elect to receive up to 100 percent of their annual retainer and meeting fees in the form of restricted stock. Other participants may elect to receive up to 15 percent of their salary and up to 75 percent of any bonus earned in the form of restricted stock. The purchase price of the restricted stock is the closing market price of the Company’s common stock on the date of purchase. The Company makes matching contributions of 25 percent of the restricted shares purchased by participants. Restricted stock issued pursuant to the Purchase

Plan vests after three years or immediately upon death, disability, or change in control, as defined. If an employee terminates employment after attaining eligibility for retirement, or a non-employee director retires upon the expiration of his or her board term, the participant’s Purchase Plan shares vest immediately. If a participant’s employment or service as a director is terminated for any other reason prior to the three-year vesting period, the participant forfeits the matching contribution and the Company may, at its option, repurchase restricted stock purchased by the participant at the price paid by the participant. Matching contributions are recognized as compensation expense over the vesting period. During fiscal 2019, 2018 and 2017, the participants purchased a total of 7,350; 10,697; and 9,605 shares of restricted stock pursuant to the Purchase Plan, valued at an average price of $128.20, $123.45, and $112.84, per share, respectively, and the Company issued 1,741; 2,565; and 2,290 matching shares, valued at an average price of $128.20, $123.45, and $112.84 per share, respectively. During fiscal 2019, 2018 and 2017, the participants vested in a total of 17,142; 17,040; and 17,034 shares of restricted stock pursuant to the Purchase Plan, valued at an average price of $89.08, $80.38, and $80.62, per share, respectively. During fiscal 2019, 2018 and 2017, the participants forfeited a total of 321; 259; and 1,461 shares of restricted stock pursuant to the Purchase Plan, respectively. Compensation expense related to the Company’s matching contribution totaled approximately $351,000, $289,000 and $392,000 in fiscal 2019, 2018 and 2017, respectively.

During fiscal 2019, 2018 and 2017, 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, they are subject to an additional one year period during which the participant must remain employed by the Company before they are paid out. If the Company’s average return on equity and average return on sales 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 entered into on November 1, 2018 totaled 74,650. As of October 31, 2019, the Company could not determine that achievement of the applicable performance based criteria is probable due to actual operating results for the first year of the two-year performance period falling below threshold levels, 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, 2017. During fiscal 2019, the Company determined based on combined results of fiscal 2018 and 2019, that achievement of the return on equity criterion for the November 1, 2017 agreements is not probable; however, the Company has determined that achievement of the return on sales criterion is probable at a level between the threshold and target levels. Accordingly, because the accrual is made using the cumulative catch-up method, fiscal 2019 includes compensation expense of $1.3 million, as compared to no compensation expense recorded during fiscal 2018 related to the agreements entered into on November 1, 2017. As of October 31, 2019, the aggregate number of shares estimated to be awarded related to the performance share agreements entered into on November 1, 2017 totaled 13,127 shares. Since 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 twelve months of the service period ending October 31, 2020. The Company will recognize the remaining $0.7 million of unearned compensation related to these shares over the remaining service period.

The Compensation Committee of the Company's Board of Directors determined that the performance shares granted November 1, 2016, were earned at a level between the threshold and target levels for the return on equity criterion and between the target and maximum levels for the return on sales criterion. Accordingly, fiscal 2019 includes compensation expense of $2.5 million, related to those agreements, as compared to $5.2 million during fiscal 2018. Because management's initial determination of probability was made during fiscal 2018, and because the accrual is made using the cumulative catch up method, the compensation expense recorded during fiscal 2018 related to the agreements entered into on November 1, 2016, was greater than that recorded during fiscal 2019. A total of 84,511 shares from the agreements entered into on November 1, 2016 vested and were issued on October 31, 2019.

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 would be earned, an additional $4.9 million would have been accrued as of October 31, 2019.

A summary of the Company's compensation cost related to performance share agreements is as follows (in thousands):


	Number of shares issued (actual (a) or estimated (e))		For the years ended
Date of Performance Share Agreement					October 31, 2019			October 31, 2018			October 31, 2017
November 1, 2014	102,193	(a)	$	—		$	—		$	2,787
November 1, 2015	145,197	(a)	—			3,341			6,752
November 1, 2016	84,511	(a)	2,504			5,238			—
November 1, 2017	13,127	(e)	1,270			—			—
November 1, 2018 (1)	—	(e)	—			—			—
Total compensation cost			$	3,774		$	8,579		$	9,539

Note (1) - As of October 31, 2019, the Company could not determine that achievement of the applicable performance-based criteria is probable for the agreements entered into on November 1, 2018 due to the uncertainties discussed above, and therefore recorded no compensation expense related to those agreements.