Sanderson Farms, Inc.
SANDERSON FARMS INC (Form: 10-Q, Received: 02/23/2017 08:07:45)
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
___________________________
FORM 10-Q
___________________________
(MARK ONE)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2017
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)
___________________________
Mississippi
64-0615843
(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.)
___________________________
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   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
 
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨   (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
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: 22,740,475 shares outstanding as of February 20, 2017 .
 


Table of Contents

INDEX
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)
 
January 31,
2017
 
October 31,
2016
 
(Unaudited)
 
(Note 1)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
225,821

 
$
234,111

Accounts receivable, net
115,633

 
124,348

Inventories
236,353

 
220,306

Refundable income taxes
4,066

 

Prepaid expenses and other current assets
37,906

 
34,559

Total current assets
619,779

 
613,324

Property, plant and equipment
1,548,434

 
1,505,596

Less accumulated depreciation
(721,664
)
 
(701,605
)
 
826,770

 
803,991

Other assets
4,989

 
5,385

Total assets
$
1,451,538

 
$
1,422,700

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
85,859

 
$
72,774

Dividends payable
5,458

 

Accrued expenses
50,248

 
57,918

Accrued income taxes

 
17,497

Total current liabilities
141,565

 
148,189

Claims payable and other liabilities
8,663

 
8,501

Deferred income taxes
87,675

 
75,748

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—22,739,985 and 22,693,225 at January 31, 2017 and October 31, 2016, respectively
22,740

 
22,693

Paid-in capital
131,466

 
125,855

Retained earnings
1,059,429

 
1,041,714

Total stockholders’ equity
1,213,635

 
1,190,262

Total liabilities and stockholders’ equity
$
1,451,538

 
$
1,422,700

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 
 January 31,
 
2017
 
2016
Net sales
$
688,346

 
$
605,166

Cost and expenses:
 
 
 
Cost of sales
606,391

 
555,061

Selling, general and administrative
46,070

 
30,294

 
652,461

 
585,355

Operating Income
35,885

 
19,811

Other income (expense):
 
 
 
Interest income
195

 

Interest expense
(432
)
 
(431
)
Other
2

 
3

 
(235
)
 
(428
)
Income before income taxes
35,650

 
19,383

Income tax expense
12,477

 
8,702

Net income
$
23,173

 
$
10,681

Earnings per share:
 
 
 
Basic
$
1.02

 
$
0.47

Diluted
$
1.02

 
$
0.47

Dividends per share
$
0.24

 
$
0.22

See notes to condensed consolidated financial statements.


4

Table of Contents

SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
 
Three Months Ended 
 January 31,
 
2017
 
2016
Operating activities
 
 
 
Net income
$
23,173

 
$
10,681

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
22,641

 
19,871

Non-cash stock compensation
5,685

 
2,722

Deferred income taxes
11,927

 
29,735

Change in assets and liabilities:
 
 
 
Accounts receivable, net
8,715

 
(6,971
)
Income taxes
(21,563
)
 
(25,846
)
Inventories
(16,047
)
 
(11,019
)
Prepaid expenses and other assets
(3,194
)
 
(2,226
)
Accounts payable
13,871

 
6,292

Accrued expenses and other liabilities
(7,939
)
 
(43,551
)
Total adjustments
14,096

 
(30,993
)
Net cash provided by (used in) operating activities
37,269

 
(20,312
)
Investing activities
 
 
 
Capital expenditures
(46,265
)
 
(22,953
)
Net proceeds from sale of property and equipment
302

 
3

Net cash used in investing activities
(45,963
)
 
(22,950
)
Financing activities
 
 
 
Proceeds from issuance of restricted stock under stock compensation plans
187

 
484

Payments from issuance of common stock under stock compensation plans
(1,966
)
 
(2,686
)
Tax benefit on vesting of restricted stock grants
2,183

 
3,910

Net cash provided by financing activities
404

 
1,708

Net change in cash and cash equivalents
(8,290
)
 
(41,554
)
Cash and cash equivalents at beginning of period
234,111

 
196,659

Cash and cash equivalents at end of period
$
225,821

 
$
155,105

Supplemental disclosure of non-cash financing activity:
 
 
 
Dividends payable
$
(5,458
)
 
$
(4,966
)
See notes to condensed consolidated financial statements.

5

Table of Contents

SANDERSON FARMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
January 31, 2017
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 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. generally accepted accounting principles 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 months ended January 31, 2017 are not necessarily indicative of the results that may be expected for the year ending October 31, 2017 .
The condensed consolidated balance sheet at October 31, 2016 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. generally accepted accounting principles 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, 2016 .
New Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued guidance requiring all income tax effects of stock awards to be recognized in the statement of operations when the awards vest or are settled rather than recording excess tax benefits or deficiencies in additional paid-in capital. Additionally, classification of the related amounts in the statement of cash flows will be recognized within operating activities, rather than financing activities. The guidance also changes accounting for an employee's use of shares to satisfy the employer's statutory tax withholding obligation and for forfeitures. The standard becomes effective for interim and annual periods beginning after December 15, 2016, our fiscal 2018. Early adoption is permitted. The effect of this new standard’s provisions on excess tax benefits or deficiencies in our consolidated financial statements will depend on the changes in the Company’s stock prices at vesting dates and grant dates for awards that vest after adoption. The changes in amounts repurchased for tax withholding purposes and changes in the accounting for forfeitures are not expected to have a material effect on our consolidated financial statements.
In February 2016, the FASB issued guidance which 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 disclosures of key information about the leasing arrangements. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2018, our fiscal 2020. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on our consolidated financial statements.
In July 2015, the FASB issued guidance that requires an entity to measure inventory at the lower of cost or net realizable value. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2016, our fiscal 2018. Early adoption is permitted and the prospective transition method should be applied. The Company is currently evaluating the impact this guidance will have on our consolidated financial statements.
In May 2014, the FASB issued guidance changing the criteria for recognizing revenue, which was amended in 2015 to defer the effective date by one year. The guidance also modifies the related disclosure requirements, clarifies guidance for multiple-element arrangements and provides guidance for transactions that were not addressed fully in previous guidance. The guidance, as amended, is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2017, our fiscal 2019. Early adoption is permitted for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact this guidance will have on our consolidated financial statements.
NOTE 2—INVENTORIES
Inventories consisted of the following:

6


 
January 31, 2017
 
October 31, 2016
 
(In thousands)
Live poultry-broilers and breeders
$
157,188

 
$
143,554

Feed, eggs and other
37,439

 
40,834

Processed poultry
21,300

 
15,378

Prepared chicken
13,615

 
13,640

Packaging materials
6,811

 
6,900

 
$
236,353

 
$
220,306

NOTE 3—STOCK COMPENSATION PLANS
Refer to Note 8 and Note 9 of the Company’s October 31, 2016 audited financial statements in the Company's 2016 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 months ended January 31, 2017 was $5,685,000 as compared to total stock based compensation expense of $2,722,000 for the three months ended January 31, 2016 .
During the three months ended January 31, 2017 , participants in the Company’s Management Share Purchase Plan (MSPP) elected to receive a total of 3,058 shares of restricted stock at an average price of $94.19 per share instead of a specified percentage of their cash compensation, and the Company issued 734 matching restricted shares. During the three months ended January 31, 2017 , the Company recorded compensation cost for the MSPP shares, included in the total stock based compensation expense above, of $60,000 as compared to $89,000 during the three months ended January 31, 2016 .
During fiscal 2017, 2016 and 2015, 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. The target number of shares specified in the performance share agreements executed on November 1, 2016 totaled 68,250 . As of January 31, 2017 , the Company could not determine that achievement of the applicable performance based criteria is probable for the agreements entered into on November 1, 2016 due to the uncertainties discussed below, 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, 2015. During the quarter ended January 31, 2017, the Company determined that achievement of the applicable performance based criteria for the November 1, 2015 agreements is probable at a level between the target and maximum levels. Accordingly, the quarter ended January 31, 2017 includes compensation expense of $3,291,000 , included in the total stock based compensation expense above, as compared to no compensation expense recorded during the quarter ended January 31, 2016, related to the agreements entered into on November 1, 2015. As of January 31, 2017, the aggregate number of shares estimated to be awarded related to the performance share agreements entered into on November 1, 2015 totaled 113,084 shares. The actual number of shares that can be awarded for those agreements could change materially from that estimate due to the Company's actual performance during the remaining nine months of the performance period ending October 31, 2017, and due to potential forfeitures.
The Compensation Committee of the Company's Board of Directors has determined that the performance shares entered into on November 1, 2014 have been earned at a level between the target and maximum levels, subject to the satisfaction of the additional one -year service period ending on October 31, 2017. Accordingly, the three months ended January 31, 2017 include compensation expense of $634,000 , related to those agreements, as compared to no compensation expense during the three months ended January 31, 2016 . There was no compensation expense recorded during the quarter ended January 31, 2016 related to the agreements entered into on November 1, 2014, because management's initial determination of probability was made during the second quarter of fiscal 2016. As of January 31, 2017 , the aggregate number of shares estimated to be awarded related to the performance share agreements entered into on November 1, 2014 totaled 102,387 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 nine months of the service period ending October 31, 2017.

7


In estimating the compensation expense to record in a period for any outstanding performance share grants, 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. The accounting for these arrangements requires the Company to accrue over the three -year service period the estimated amounts that will be earned with changes made during the service period adjusted using the cumulative catch up method. Had the Company determined that it was probable that the maximum amount of those outstanding awards from the agreements entered into on November 1, 2015 and November 1, 2016 would be earned, an additional $1.4 million and $1.0 million, respectively, would have been accrued as of January 31, 2017 .
The Company's compensation cost related to performance share agreements is summarized as follows (in thousands, except number of shares):
 
 
 
 
Three months ended
Date of Performance Share Agreement
 
Number of shares issued (actual (a) or estimated (e))
 
January 31, 2017
 
January 31, 2016
November 1, 2013
 
146,169 (a)
 
$

 
$
767

November 1, 2014
 
102,387 (e)
 
634

 

November 1, 2015
 
113,084 (e)
 
3,291

 

November 1, 2016 (1)
 
— (e)
 

 

Total compensation cost
 
 
 
$
3,925

 
$
767


Note (1) - As of January 31, 2017, the Company could not determine that achievement of the applicable performance based criteria is probable for the agreements entered into on November 1, 2016 due to the uncertainties discussed above, and therefore recorded no compensation expense related to those agreements.
On November 1, 2016, the Company granted 68,250 shares of restricted stock to certain officers and key management employees. The restricted stock had a grant date fair value of $91.61 per share and will vest on November 1, 2020 . On February 9, 2017, the Company granted an aggregate of 15,237 shares of restricted stock to all of its non-employee directors. The restricted stock had a grant date fair value of $88.61 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 January 31, 2017 related to all unvested restricted stock grants totaled 310,700 . During the three months ended January 31, 2017 , the Company recorded compensation cost, included in the total stock based compensation expense above, of $1,700,000 related to restricted stock grants, as compared to $1,866,000 during the three months ended January 31, 2016 . The Company had $13.4 million in unrecognized share-based compensation costs as of January 31, 2017 , that will be recognized over a weighted average remaining vesting period of approximately 2 years, 4 months .
NOTE 4—EARNINGS PER SHARE
Certain share-based payment awards described in Note 3 - 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 table presents earnings per share.

8


 
Three months ended
 
January 31, 2017
 
January 31, 2016
 
(in thousands except per share amounts)
Net Income
$
23,173

 
$
10,681

Distributed and undistributed (earnings) to unvested restricted stock
(368
)
 
(172
)
Distributed and undistributed earnings to common shareholders—Basic
$
22,805

 
$
10,509

Weighted average shares outstanding—Basic
22,379

 
22,206

Weighted average shares outstanding—Diluted
22,379

 
22,206

Earnings per common share—Basic
$
1.02

 
$
0.47

Earnings per common share—Diluted
$
1.02

 
$
0.47

NOTE 5—FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company holds certain items that are required to be disclosed at fair value, primarily cash equivalents. 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 January 31, 2017, and October 31, 2016, the fair value of the Company's cash and cash equivalents 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.
NOTE 6—COMMITMENTS AND CONTINGENCIES
Property, Plant and Equipment
On March 12, 2015, the Company announced the selection of St. Pauls and Robeson County, North Carolina, for the construction of a new poultry processing complex. The completed complex consists of a hatchery, processing plant, waste water treatment facility, and an expansion of the Company's existing feed mill in Kinston, North Carolina. Construction commenced in July 2015, and initial operations of the new complex began during the first quarter of fiscal 2017. The Company estimates the total investment in the complex will be approximately $155.0 million . As of January 31, 2017 , the Company has spent approximately $147.4 million on the project, including approximately $265,000 of capitalized interest, and we are obligated to spend the remaining $7.6 million during the remainder of fiscal 2017.
As of January 31, 2017, the Company has outstanding commitments totaling $51.2 million related to purchase agreements for future delivery of aircraft. These commitments are expected to be paid as follows: $15.0 million during fiscal 2017, $22.1 million during fiscal 2018, and $14.1 million during fiscal 2019.
Litigation

9


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. The court has consolidated each of the direct purchaser complaints into one case, and each of the indirect purchaser complaints into one case. On October 28, 2016, the plaintiffs filed consolidated, amended complaints in each case, and on November 23, 2016, the plaintiffs filed second amended complaints. On January 27, 2017 the defendants filed motions to dismiss the amended complaints. The lawsuits are in the earliest stages and we intend to defend them vigorously; however, the Company cannot predict the outcome of these actions. If the plaintiffs were to prevail, the Company could be liable for damages, which could have a material, adverse effect on our financial position and results of operations.
Sanderson Farms, Inc.; Joe F. Sanderson, Jr., the Chairman of the Registrant’s Board of Directors and its Chief Executive Officer; and D. Michael Cockrell, director and Chief Financial Officer, were named as defendants in a putative class action lawsuit filed on October 28, 2016, in the United States District Court for the Southern District of New York. The complaint alleges that the defendants made statements in the Company's SEC filings and press releases, and other public statements, that were materially false and misleading in light of the Company's alleged, undisclosed violation of the federal antitrust laws described above. The complaint also alleges that the material misstatements were made in order to, among other things, “artificially inflate and maintain the market price of Sanderson Farms securities.” The complaint alleges the defendants thereby violated the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, and seeks damages, interest, costs and attorneys’ fees. The lawsuit is in its earliest stage and the defendants intend to defend it vigorously; however, the Company cannot predict the outcome of these actions. If the plaintiffs were to prevail, the Company could be liable for damages, which could have a material, adverse effect on our financial position and results of operations.
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. The 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 complaint also alleges that the defendants unlawfully conspired to not solicit or hire the broiler farmers who were providing services to other defendants. The complaint seeks treble damages, costs and attorneys’ fees. The lawsuit is in its early stages, and we intend to defend it vigorously. 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.
On February 21, 2017, Sanderson Farms, Inc. received an antitrust civil investigative demand from the Office of the Attorney General, Department of Legal Affairs, of the State of Florida. The Company intends to cooperate fully with the investigative demand. Among other things, the demand seeks information related to the Georgia Dock Index and other information on poultry and poultry products published by the Georgia Department of Agriculture and its Poultry Market News division. We are unable to predict the outcome of the investigative demand at this time.
The Company is involved in various other claims and litigation incidental to its business. Although the outcome of these matters cannot be determined with certainty, management, upon the advice of counsel, is of the opinion that the final outcome of currently pending matters, other than those discussed above, should not have a material effect on the Company’s consolidated results of operations or financial position.
The Company recognizes the costs of legal defense for the legal proceedings to which it is a party in the periods incurred. After a considerable analysis of each case, the Company determines the amount of reserves required, if any. At this time, the Company has not accrued any reserve for any matters. Future reserves may be required if losses are deemed reasonably estimable and probable due to changes in the Company’s assumptions, the effectiveness of legal strategies, or other factors beyond the Company’s control. Future results of operations may be materially affected by the creation of reserves or by accruals of losses to reflect any adverse determinations in these legal proceedings.
NOTE 7—CREDIT AGREEMENT
The Company is a party to a revolving credit facility dated April 24, 2015 with a maximum available borrowing capacity of $750.0 million . The facility has an annual capital expenditure limitation of $100.0 million for fiscal years 2017 through 2020, and permits up to $15.0 million of the unused capital expenditure limitation from the prior fiscal year to be carried over to the

10


next fiscal year. The capital expenditure limitation for fiscal 2017 is $115.0 million . The credit facility also permits the Company to spend up to $160.0 million in capital expenditures on the construction of the new poultry complex in St. Pauls, North Carolina, and up to $175.0 million in capital expenditures on the construction of a potential additional new poultry complex, which expenditures are in addition to the annual capital expenditure limits. In addition to the annual capital expenditure limits, the credit facility permits the Company to spend up to $15.0 million in capital expenditures on the acquisition of a new aircraft, and that provision was utilized during fiscal 2015 and the first quarter of fiscal 2016. Under the 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 either the St. Pauls, North Carolina complex or a second potential new poultry complex for the four fiscal quarters beginning on the first day of the fiscal quarter during which the Company gives written notice of its intent to exercise this right. The Company has not exercised this right. The facility also sets a minimum net worth requirement that at January 31, 2017 , was $843.9 million . The credit is unsecured and, unless extended, will expire on April 24, 2020 . As of January 31, and February 20, 2017 , the Company had no outstanding draws under the facility, and had approximately $19.7 million outstanding in letters of credit, leaving $730.3 million of borrowing capacity available under the facility.

11


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Sanderson Farms, Inc.
We have reviewed the condensed consolidated balance sheet of Sanderson Farms, Inc. and subsidiaries as of January 31, 2017 , and the related condensed consolidated statements of operations for the three -month periods ended January 31, 2017 and 2016 and the condensed consolidated statements of cash flows for the three -month periods ended January 31, 2017 and 2016 . These financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Sanderson Farms, Inc. and subsidiaries as of October 31, 2016 , and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended not presented herein and we expressed an unqualified opinion on those consolidated financial statements in our report dated December 15, 2016. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet of Sanderson Farms, Inc. and its subsidiaries as of October 31, 2016 , is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
New Orleans, Louisiana
February 23, 2017

12


Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The following Discussion and Analysis 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 ended October 31, 2016 .
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" section of our latest 10-K and 10-Q reports, and to 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 or U.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 market 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 market 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 the United States.
(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 its operations, or changes in global weather patterns that could affect the supply of feed grains.
(12) Failure to respond to changing consumer preferences and negative 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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Readers are cautioned not to place undue reliance on forward-looking statements made by or on behalf of Sanderson 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 earnings, production levels, capital expenditures, grain prices, supply and demand factors and other industry conditions.
GENERAL
The Company’s poultry operations are integrated through its control of all functions relative to the production of its chicken products, including hatching egg production, hatching, feed manufacturing, raising chickens to marketable age (“grow out”), processing, marketing and distribution. The Company’s prepared chicken product line includes approximately 70 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.
Consistent with the poultry industry, the Company’s profitability is substantially affected by the market prices for its finished products and feed grains, both of which may fluctuate substantially 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 cost, are responsive to efficient cost containment programs and management practices.
In February 2015, the Company began initial operations at a new poultry processing complex in Palestine, Texas. The complex consists of a feed mill, hatchery, poultry processing plant and wastewater facility with the capacity to process 1.25 million chickens per week. During the first quarter of fiscal 2017 , the Palestine processing plant processed approximately 134.1 million pounds of dressed poultry meat, as compared to approximately 62.6 million pounds during the first quarter of fiscal 2016. See “The construction and potential benefits of our new facilities are subject to risks and uncertainties” in the Risk Factors section of our Annual Report on Form 10-K for the fiscal year ended October 31, 2016 .
On March 12, 2015, the Company announced selection of St. Pauls and Robeson County, North Carolina, for the construction of a new poultry processing complex. The completed complex consists of a hatchery, processing plant, waste water treatment facility, and an expansion of the Company's existing feed mill in Kinston, North Carolina. Construction began in July 2015, and initial operations of the new complex began during the first quarter of fiscal 2017. At full capacity, the new complex will process 1.25 million chickens per week. Before the complex can reach full production, we will need to enter into contracts with a sufficient number of independent contract poultry producers to house the live inventory and hire and train our workforce. See "The construction and potential benefits of our new facilities are subject to risks and uncertainties" in the Risk Factors section of our Annual Report on Form 10-K for the fiscal year ended October 31, 2016 .
The Company is a party to a revolving credit facility dated April 24, 2015 with a maximum available borrowing capacity of $750.0 million. The facility has an annual capital expenditure limitation of $100.0 million for fiscal years 2017 through 2020, and permits up to $15.0 million of the unused capital expenditure limitation from the prior fiscal year to be carried over to the next fiscal year. The capital expenditure limitation for fiscal 2017 is $115.0 million. The credit facility also permits the Company to spend up to $160.0 million in capital expenditures on the construction of the new poultry complex in St. Pauls, North Carolina, and up to $175.0 million in capital expenditures on the construction of a potential additional new poultry complex, which expenditures are in addition to the annual capital expenditure limits. In addition to the annual capital expenditure limits, the credit facility permits the Company to spend up to $15.0 million in capital expenditures on the acquisition of a new aircraft, which was spent during fiscal 2015 and the first quarter of fiscal 2016. Under the 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 either the St. Pauls, North Carolina complex or a second potential new poultry complex for the four fiscal quarters beginning on the first day of the fiscal quarter during which the Company gives written notice of its intent to exercise this right. The Company has not exercised this right. The facility also sets a minimum net worth requirement that at January 31, 2017 , was $843.9 million . The credit is unsecured and, unless extended, will expire on April 24, 2020. As of January 31, and February 20, 2017 , the Company had no outstanding draws under the facility, and had approximately $19.7 million outstanding in letters of credit, leaving $730.3 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 filed April 29, 2015, which is incorporated herein by reference.

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EXECUTIVE OVERVIEW OF RESULTS
The Company's margins increased during the first quarter of fiscal 2017 when compared to the same period a year ago, reflecting higher average sales prices and lower grain prices. These results reflect higher dark meat prices during the first quarter of 2017, compared to the first quarter of 2016, as all avian-influenza related export bans that were in place during the first quarter of fiscal 2016, except for China's, have been lifted. Additionally, demand from retail grocery store customers has remained stable, and that stability is reflected in only slightly lower market prices for fresh chicken sold at retail grocery stores compared to last year's first quarter. Market prices for boneless skinless breast meat produced at our plants that produce a larger sized bird were lower during the first quarter of fiscal 2017, as compared to the same quarter a year ago, and while those prices have improved during February, market prices for boneless breast meat reflect continued weakness in demand from food service customers. Demand and market prices for jumbo wings were seasonally strong during the first fiscal quarter.
Grain costs were lower during the first quarter of fiscal 2017 as compared to the same period a year ago. During the first quarter of fiscal 2017, as compared to the first quarter of fiscal 2016, the average feed cost in broiler flocks processed was 4.9% lower. The Company has priced a portion of its grain needs through the second quarter of fiscal 2017. Had it priced its remaining fiscal year 2017 needs at February 20, 2017 cash market prices, its costs of feed grains would be approximately $57.2 million higher during fiscal 2017 as compared to fiscal 2016.
RESULTS OF OPERATIONS
Net sales for the first quarter ended January 31, 2017 were $688.3 million as compared to $605.2 million for the first quarter ended January 31, 2016 , an increase of $83.2 million , or 13.7% . Net sales of poultry products for the first quarter ended January 31, 2017 and 2016 , were $647.5 million and $560.7 million , respectively, an increase of $86.8 million , or 15.5% . The increase in net sales of poultry products resulted from a 2.7% increase in the average sales price of poultry products sold and a 12.4% increase in the pounds of poultry products sold. During the first quarter of fiscal 2017 , the Company sold 967.2 million pounds of poultry products, up from 860.3 million pounds during the first quarter of fiscal 2016 . The increased pounds of poultry products sold resulted from a 12.0% increase in the number of head processed and a 2.8% increase in the average live weight of poultry processed. The new St. Pauls processing facility, which began initial operations in January 2017, sold 8.8 million pounds of poultry products during the first quarter of fiscal 2017, or 0.9% of the Company's total poultry pounds sold during the quarter. The Palestine processing facility, which began initial operations during February 2015, processed 15.3 million head during the first quarter of fiscal 2017, or approximately 11.9% of the Company's total head processed during the period, and sold approximately 133.5 million pounds of poultry products during the first quarter, or 13.8% of the Company's total poultry pounds sold during the period. By comparison, the Palestine facility processed 7.3 million head during the first quarter of fiscal 2016 , or approximately 6.4% of the Company's total head processed during the period, and sold approximately 63.0 million pounds of poultry products during the first quarter of fiscal 2016 , or approximately 7.3% of the Company's total poultry pounds sold during the period. Overall, market prices for poultry products increased during the first quarter of fiscal 2017 as compared to the same quarter of fiscal 2016 . When compared to the first quarter of fiscal 2016 , Urner Barry average market prices for tenders, jumbo wings and bulk leg quarters increased by 14.9%, 14.3% and 33.1%, respectively, while market prices for boneless breast meat decreased by 4.6%. Average market prices for chill pack products sold to retail grocery store customers decreased 2.7% as compared to the average during the first fiscal quarter of 2016. Net sales of prepared chicken products for the first quarter ended January 31, 2017 and 2016 were $40.8 million and $44.5 million , respectively, or a decrease of 8.2% . This decrease resulted from a 1.4% decrease in the average sales price of prepared chicken products sold and a 6.9% decrease in the pounds of prepared chicken products sold. During the first quarter of fiscal 2017 , the Company sold 20.7 million pounds of prepared chicken products, down from 22.3 million  pounds during the first quarter of fiscal 2016 .
Cost of sales for the first quarter of fiscal 2017 was $606.4 million as compared to $555.1 million during the first quarter of fiscal 2016 , an increase of $51.3 million , or 9.3% . Cost of sales of poultry products during the first quarter of fiscal 2017 , as compared to the first quarter of fiscal 2016 , was $571.0 million and $515.8 million , respectively, which represents a 1.5% decrease in the average cost of sales 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 decrease in the average cost of sales of poultry products resulted from a decrease in the cost of feed per pound of broilers processed of $0.0128 , or 4.9% , and a $0.0065 per pound decrease in other costs of sales of poultry products.






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Poultry Cost of Sales
(In thousands, except per pound data)
 
First Quarter 2017
 
First Quarter 2016
 
Incr/(Decr)
Description
Dollars
 
Per lb.
 
Dollars
 
Per lb.
 
Dollars
 
Per lb.
Beginning Inventory
$
15,378

 
$
0.3397

 
$
10,158

 
$
0.2171

 
$
5,220

 
$
0.1226

Feed in broilers processed
245,149

 
0.2493

 
224,101

 
0.2621

 
21,048

 
(0.0128
)
All other cost of sales
339,972

 
0.3457

 
301,159

 
0.3522

 
38,813

 
(0.0065
)
Less: Ending Inventory
21,300

 
0.3925

 
7,662

 
0.2415

 
13,638

 
0.1510

Total poultry cost of sales
$
579,199

(1)  
$
0.5947

 
$
527,756

(1)  
$
0.6066

 
$
51,443

 
$
(0.0119
)
Pounds:
 
 
 
 
 
 
 
 
 
 
 
Beginning Inventory
45,272

 
 
 
46,800

 
 
 
 
 
 
Poultry processed
983,400

 
 
 
855,020

 
 
 
 
 
 
Poultry sold
973,874

(1)  
 
 
869,987

(1)  
 
 
 
 
 
Ending Inventory
54,273

 
 
 
31,727

 
 
 
 
 
 
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 include labor, contract grower pay, packaging, freight and certain fixed costs, among other costs. These non-feed related costs of poultry products sold decreased by $0.0065 per pound processed, or 1.8% , during this year’s first fiscal quarter compared to the same quarter a year ago, primarily attributable to increased efficiencies realized at the Company's Palestine, Texas facilities as the volume of processed pounds increased, partially offset by inefficiencies at the Company's new St. Pauls, North Carolina facilities, which began initial operations during the first quarter of fiscal 2017. The new facilities' other costs of sales per pound processed will be higher compared to similar complexes until the complex reaches full capacity. Excluding St. Pauls, other costs of sales would have decreased by $0.0095 per pound processed, or 2.7%.
Costs of sales of the Company’s prepared chicken products during the first quarter of fiscal 2017 were $35.4 million as compared to $39.3 million during the same quarter a year ago, a decrease of $3.9 million , or 10.0% , primarily attributable to a 6.9% decrease in the pounds of prepared chicken sold and a 6.8% decrease in the costs per pound of raw material purchases, partially offset by a 3.2% increase in processing costs per pound. The increase in processing costs per pound is primarily attributable to a 9.6% decrease in the Company's prepared chicken pounds processed compared to the first quarter of fiscal 2016.
The Company recorded the value of live broiler inventories on hand at January 31, 2017 at cost. When market conditions are favorable, 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 date. In periods where the Company estimates that the cost to grow live birds in inventory to a marketable age, process, and distribute those birds will be higher in the aggregate than the anticipated sales price, the Company will make an adjustment to lower the value of live birds in inventory to the market value. No such charge was required at January 31, 2017 or January 31, 2016 .
Selling, general and administrative ("SG&A") costs during the three months ended January 31, 2017 were $46.1 million , an increase of $15.8 million compared to the $30.3 million during the three months ended January 31, 2016 . The following table includes the components of SG&A costs for the three months ended January 31, 2017 and 2016 .

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Selling, General and Administrative Costs
(in thousands)
Description
Three Months Ended January 31, 2017
 
Three Months Ended January 31, 2016
 
Increase/(Decrease)
Marketing expense
$
8,734

 
$
1,083

 
$
7,651

Start-up expense - St. Pauls
4,022

 
1,050

 
2,972

Stock compensation expense
5,607

 
2,660

 
2,947

Administrative salaries
8,467

 
7,811


656

Trainee expense
3,312

 
2,924

 
388

All other S,G & A
15,928

 
14,766


1,162

Total S,G & A
$
46,070

 
$
30,294


$
15,776

As illustrated in the table above, the majority of the $15.8 million increase in SG&A costs during the first quarter of fiscal 2017 as compared to the same period a year ago resulted from increases in marketing, start-up and stock compensation expenses. The increase in marketing expenses is the result of an advertising campaign launched during the third quarter of fiscal 2016. The change in start-up expense in any particular period relates to the stage of the start-up process in which a facility under construction is in during the period. Non-construction related expenses, such as labor, training and office-related expenses for a facility under construction are recorded as start-up expense until the facility begins operations. As a facility moves closer to actual start-up, the expenses incurred for labor, training, etc. increase. As a result, amounts classified as start-up expenses will increase period over period until the facility begins production. Once production begins, the expenses from that point forward are recorded as costs of goods sold. The change in stock compensation expense is largely attributable to the timing of accruals related to the Company's performance share agreements with key employees, as described in "Note 3 - Stock Compensation Plans" in the notes to our consolidated financial statements.
The Company’s operating income for the three months ended January 31, 2017 was $35.9 million , as compared to an operating income for the three months ended January 31, 2016 of $19.8 million . The increase in operating income for the three months ended January 31, 2017 , as compared to the same period a year ago, resulted primarily from a 1.6% increase in average selling prices per pound, a 2.4% decrease in average costs of goods sold per pound and an 11.9% increase in pounds sold.
Interest expense during the first quarter of fiscal 2017 was $0.4 million , as compared to $0.4 million during the same period a year ago.
The Company’s effective tax rate for the three months ended January 31, 2017 was 35.0% , as compared to 44.9% for the three months ended January 31, 2016 . During the first fiscal quarter of 2016, the Company took advantage of legislation enacted during the quarter, which allowed for bonus depreciation to be taken on qualifying assets placed in service during the 2015 calendar year. The legislation, and the Company's election to accelerate depreciation on these items, resulted in a favorable impact on the Company's cash tax refund, but had an unfavorable effect on tax deductions that are based on levels of pre-tax income, most especially the Internal Revenue Code Section 199 Domestic Production Activities Deduction. Had the Company not elected to take advantage of the legislation, the effective tax rate for the first quarter of fiscal 2016 would have been approximately 35.1%. The Company expects its effective tax rate for the full fiscal 2017 to be approximately 35.0%.
As of January 31, 2017 , the Company's long-term deferred income tax liability was $87.7 million as compared to $75.7 million at October 31, 2016 , an increase of $12.0 million. This increase is primarily attributable to the Company's decision to take bonus depreciation on qualifying assets placed in service during the quarter. The value of assets placed in service during the quarter is significant due to the start-up of the Company's new St. Pauls, North Carolina facilities.
During the three months ended January 31, 2017 , the Company’s net income was $23.2 million , or $1.02 per share. For the three months ended January 31, 2016 , the Company’s net income was $10.7 million , or $0.47 per share.
Liquidity and Capital Resources
The Company’s working capital, calculated by subtracting current liabilities from current assets, at January 31, 2017 was $478.2 million , and its current ratio, calculated by dividing current assets by current liabilities, was 4.4 to 1. The Company’s working capital and current ratio at October 31, 2016 were $465.1 million and 4.1 to 1. 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

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Company’s principal sources of liquidity during fiscal 2017 include cash on hand at October 31, 2016 , 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 dated April 24, 2015, with a maximum available borrowing capacity of $750.0 million. As of January 31, and February 20, 2017 , the Company had no outstanding draws under the facility and had approximately $19.7 million outstanding in letters of credit, leaving $730.3 million of borrowing capacity available under the facility.
The Company’s cash position at January 31, 2017 and October 31, 2016 consisted of $225.8 million and $234.1 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 at January 31, 2017 and October 31, 2016 was held in bank accounts and 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 (used in) operating activities during the three months ended January 31, 2017 and 2016 , were $37.3 million and $(20.3) million , respectively. Cash flows from operating activities increased by $57.6 million , resulting primarily from a reduction in cash bonuses paid by the Company, which were $30.4 million during the first quarter of 2016, as compared to $0.4 million during the first quarter of 2017. Additionally, an increase in market prices for poultry products and a decrease in the costs of feed grains experienced by the Company during the first three months of fiscal 2017 as compared to the same period in fiscal 2016 benefited cash flows provided by operating activities.
Cash flows used in investing activities during the first three months of fiscal 2017 and 2016 were $46.0 million and $23.0 million , respectively. The Company’s capital expenditures during the first three months of fiscal 2017 were approximately $46.3 million , and included approximately $14.0 million related to progress payments made under purchase agreements for future delivery of new aircraft as described below and $11.7 million related to construction at the St. Pauls, North Carolina complex. Capital expenditures for the first three months of fiscal 2016 were $23.0 million , including approximately $5.4 million for construction of the St. Pauls, North Carolina complex, and approximately $2.4 million for construction of a new office building on the site of the Company's headquarters in Laurel, Mississippi.
Cash flows provided by financing activities during the three months ended January 31, 2017 and 2016 were $0.4 million and $1.7 million , respectively. The Company made no change to the net outstanding borrowings under its revolving credit facility in either of the comparative periods.
As of February 20, 2017, the Company’s capital budget for fiscal 2017 , excluding operating leases and commitments related to the purchase agreements for future delivery of aircraft described below, is expected to be approximately $109.5 million. The 2017 capital budget will be funded by internally generated working capital, cash flows from operations and, as needed, funds available under the Company's revolving credit facility. The Company had $730.3 million available under the revolving line of credit at January 31, 2017. The fiscal 2017 capital budget is expected to include approximately $18.3 million for construction of the Company’s new St. Pauls, North Carolina complex. Excluding the budget for the new construction and the aircraft purchase agreements, the fiscal 2017 capital budget is expected to be approximately $91.2 million. These amounts are estimates and are subject to change as we move through fiscal 2017.
On December 22, 2016, the Company entered into three separate purchase agreements for three new aircraft to be delivered over the next three calendar years. The new aircraft will replace aircraft currently owned by the Company that are scheduled to be retired and removed from service in the ordinary course of business. The agreements require that the Company make periodic payments, with final payments due upon delivery of each aircraft. During the first fiscal quarter of 2017, the Company made payments of $14.0 million under the agreements, and will make payments of an additional $15.0 million during the remaining nine months of fiscal 2017. The Company expects to make payments of approximately $22.1 million and $14.1 million during fiscal 2018 and 2019, respectively. These payments and commitments are not reflected in the capital budget figures described above, and the Company intends to request the banks party to its revolving credit facility described below to exclude the aircraft expenditures from its capital budget limitations as with past aircraft purchases. If the Company is unsuccessful negotiating such an exception, capital budgets will be adjusted to ensure compliance with the capital budget limitations set forth in the revolving credit facility.
The Company has a Form S-3 “shelf” registration statement on file with the Securities and Exchange Commission to register, for possible future sale, shares of the Company’s common and/or preferred stock at an aggregate offering price not to exceed $1.0 billion. The 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.
On March 12, 2015, the Company announced selection of St. Pauls and Robeson County, North Carolina, for the construction of a new poultry processing complex. The completed complex consists of a hatchery, processing plant, waste water treatment

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facility, and an expansion of the Company's current feed mill in Kinston, North Carolina. Construction began in July 2015, and initial operations of the new complex began during the first quarter of fiscal 2017. At full capacity, the new complex will process 1.25 million chickens per week. The Company estimates the total cost of the project will be approximately $155.0 million, and as of January 31, 2017, it has spent approximately $147.4 million, of which $11.7 million was spent during the first three months of fiscal 2017. Before the complex can reach full capacity, we will need to enter into contracts with a sufficient number of independent contract poultry producers to house the live inventory and hire and train our workforce. See "The construction and potential benefits of our new facilities are subject to risks and uncertainties" in the Risk Factors section of our Annual Report on Form 10-K for the fiscal year ended October 31, 2016 .
The Company is a party to a revolving credit facility dated April 24, 2015 with a maximum available borrowing capacity of $750.0 million. The facility has an annual capital expenditure limitation of $100.0 million for fiscal years 2017 through 2020, and permits up to $15.0 million of the unused capital expenditure limitation from the prior fiscal year to be carried over to the next fiscal year. The capital expenditure limitation for fiscal 2017 is $115.0 million. The credit facility also permits the Company to spend up to $160.0 million in capital expenditures on the construction of the new poultry complex in St. Pauls, North Carolina, and up to $175.0 million in capital expenditures on the construction of a potential additional new poultry complex, which expenditures are in addition to the annual capital expenditure limits. In addition to the annual capital expenditure limits, the credit facility permits the Company to spend up to $15.0 million in capital expenditures on the acquisition of a new aircraft, which was spent during fiscal 2015 and the first quarter of fiscal 2016. Under the 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 either the St. Pauls, North Carolina complex or a second potential new poultry complex for the four fiscal quarters beginning on the first day of the fiscal quarter during which the Company gives written notice of its intent to exercise this right. The Company has not exercised this right. The facility also sets a minimum net worth requirement that at January 31, 2017 , was $843.9 million . The credit is unsecured and, unless extended, will expire on April 24, 2020. As of January 31, and February 20, 2017 , the Company had no outstanding draws under the facility, and had approximately $19.7 million outstanding in letters of credit, leaving $730.3 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 filed April 29, 2015, which is incorporated herein by reference.
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.

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 ended October 31, 2016 .

New Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued guidance requiring all income tax effects of stock awards to be recognized in the statement of operations when the awards vest or are settled rather than recording excess tax benefits or deficiencies in additional paid-in capital. Additionally, classification of the related amounts in the statement of cash flows will be recognized within operating activities, rather than financing activities. The guidance also changes accounting for an employee's use of shares to satisfy the employer's statutory tax withholding obligation and for forfeitures. The standard becomes effective for interim and annual periods beginning after December 15, 2016, our fiscal 2018. Early adoption is permitted. The effect of this new standard’s provisions on excess tax benefits or deficiencies in our consolidated financial statements will depend on the changes in the Company’s stock prices at vesting dates and grant dates for awards that vest after adoption. The changes in amounts repurchased for tax withholding purposes and changes in the accounting for forfeitures are not expected to have a material effect on our consolidated financial statements.
In February 2016, the FASB issued guidance which 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 disclosures of key

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information about the leasing arrangements. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2018, our fiscal 2020. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on our consolidated financial statements.
In July 2015, the FASB issued guidance that requires an entity to measure inventory at the lower of cost or net realizable value. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2016, our fiscal 2018. Early adoption is permitted and the prospective transition method should be applied. The Company is currently evaluating the impact this guidance will have on our consolidated financial statements.
In May 2014, the FASB issued guidance changing the criteria for recognizing revenue, which was amended in 2015 to defer the effective date by one year. The guidance also modifies the related disclosure requirements, clarifies guidance for multiple-element arrangements and provides guidance for transactions that were not addressed fully in previous guidance. The guidance, as amended, is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2017, our fiscal 2019. Early adoption is permitted for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact this guidance will have on our consolidated financial statements.

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Item 3.
Quantitative and Qualitative Disclosures about Market Risk
The Company is a purchaser of certain commodities, primarily corn and soybean meal, for use in manufacturing feed for its chickens. As a result, the Company’s earnings are affected by changes in the price and availability of such feed ingredients. Feed grains are subject to volatile price changes caused by factors described below that include weather, size of harvest, transportation and storage costs and the agricultural policies of the United States and foreign governments. The price fluctuations of feed grains have a direct and material effect on the Company’s profitability.
Generally, the Company commits to purchase feed ingredients for deferred delivery from one month to nine months after the time of the commitment. The Company sometimes purchases its feed ingredients for prompt delivery to its feed mills at market prices at the time of such purchases. The grain purchases are made directly with our usual grain suppliers, which are companies in the business of regularly supplying grain to end users, and do not involve options to purchase. Such purchases occur when our chief operating decision maker concludes that market factors indicate that prices at the time the grain is needed are likely to be higher than current prices, or where, based on current and expected market prices for the Company’s poultry products, our chief operating decision maker believes the Company can purchase feed ingredients at prices that will allow the Company to earn a reasonable return for its shareholders. Market factors considered by our chief operating decision maker in determining whether or not and to what extent to commit to buy grain for deferred delivery include:
Current market prices;
Current and predicted weather patterns in the United States, South America, China and other grain producing areas, as such weather patterns might affect the planting, growing, harvesting and yield of feed grains;
The expected size of the harvest of feed grains in the United States and other grain producing areas of the world as reported by governmental and private sources;
Current and expected changes to the agricultural policies of the United States and foreign governments;
The relative strength of United States currency and expected changes therein as it might affect the ability of foreign countries to buy United States feed grain commodities;
The current and expected volumes of export of feed grain commodities as reported by governmental and private sources;
The current and expected use of available feed grains for uses other than as livestock feed grains (such as the use of corn for the production of ethanol, which use is affected by the price of crude oil); and
Current and expected market prices for the Company’s poultry products.
The Company purchases physical grain, not financial instruments such as puts, calls or straddles that derive their value from the value of physical grain. Thus, the Company does not use derivative financial instruments as defined in ASC 815, “Accounting for Derivatives for Instruments and Hedging Activities,” or any market risk sensitive instruments of the type contemplated by Item 305 of Regulation S-K. The Company does not enter into any derivative transactions or purchase any grain-related contracts other than the physical grain contracts described above.
Although the Company does not use derivative financial instruments as defined in ASC 815 or purchase market risk sensitive instruments of the type contemplated by Item 305 of Regulation S-K, the commodities that the Company does purchase for physical delivery, primarily corn and soybean meal, are subject to price fluctuations that have a direct and material effect on the Company’s profitability as mentioned above. During the first quarter of fiscal 2017 , the Company purchased approximately 27.5 million bushels of corn and approximately 252,396 tons of soybean meal for use in manufacturing feed for its live chickens. A $1.00 change in the average market price paid per bushel for corn would have affected the Company’s cash outlays for corn by approximately $27.5 million in the first quarter of fiscal 2017 . Likewise, a $10.00 change in the price paid per ton for soybean meal would affect the Company’s cash outlays by approximately $2.5 million .
Although changes in the market price paid for feed grains affect cash outlays at the time the Company purchases the grain, such changes do not immediately affect cost of sales. The cost of feed grains is recognized in cost of sales, on a first-in-first-out basis, at the same time that the sales of the chickens that consume the feed grains are recognized. Thus, there is a lag between the time cash is paid for feed ingredients and the time the cost of such feed ingredients is reported in cost of goods sold. For example, corn delivered to a feedmill and paid for one week might be used to manufacture feed the following week. However, the chickens that eat that feed might not be processed and sold for another 48-62 days, and only at that time will the costs of the feed consumed by the chicken become included in cost of goods sold.

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During the first quarter of fiscal 2017 , the Company’s average feed cost per pound of broilers processed totaled $0.2493 per pound. Feed costs per pound of broilers processed consist primarily of feed grains, but also include other feed ingredients such as vitamins, fat and mineral feed supplements. The average feed cost per pound is influenced not only by the price of feed ingredients, but also by the efficiency with which live chickens convert feed into body weight. Factors such as weather, poultry husbandry, quality of feed ingredients and the quality, size and health of the bird, among others, affect the quantity of feed necessary to mature chickens to the target live weight and the efficiency of that process. Generally, however, a $1.00 change in the average price paid per bushel of corn fed to a chicken during its life would have affected average feed cost per pound of broilers processed by $0.0280 , based on the quantity of grain used during the first quarter of fiscal 2017 . Similarly, a $10.00 change in the average price paid per ton of soybean meal would have influenced the average feed cost per pound of broilers processed by $0.0025 during the first quarter of fiscal 2017 .
The following table shows the impact of hypothetical changes in the price of corn and soybean meal on both the Company’s cash flow and cost of goods sold, based on quantities actually purchased in the first quarter of fiscal 2017 :
Feed Ingredient
Quantity Purchased
during the First
Fiscal Quarter of
2017
 
Hypothetical Price
Change
 
Impact on Cash
Outlay
 
Ultimate Impact on
Feed Cost per
Pound of broilers
Processed
Corn
27.5 million bushels
 
$1.00 per bushel
 
$27.5 million
 
$0.0280/lb processed
Soybean meal
252,396 tons
 
$10.00 per ton
 
$2.5 million
 
$0.0025/lb processed
Typically, the Company’s interest expense is sensitive to changes in the general level of interest rates in the United States, and the Company maintains certain of its debt as fixed rate in nature to mitigate the impact of fluctuations in interest rates. At January 31, 2017 , the Company had no outstanding debt on its balance sheet.
Item 4.
Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of January 31, 2017 .
There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended January 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
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. The court has consolidated each of the direct purchaser complaints into one case, and each of the indirect purchaser complaints into one case. On October 28, 2016, the plaintiffs filed consolidated, amended complaints in each case, and on November 23, 2016, the plaintiffs filed second amended complaints. On January 27, 2017 the defendants filed motions to dismiss the amended complaints. The lawsuits are in the earliest stages and we intend to defend them vigorously; however, the Company cannot

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predict the outcome of these actions. If the plaintiffs were to prevail, the Company could be liable for damages, which could have a material, adverse effect on our financial position and results of operations.
Sanderson Farms, Inc.; Joe F. Sanderson, Jr., the Chairman of the Registrant’s Board of Directors and its Chief Executive Officer; and D. Michael Cockrell, director and Chief Financial Officer, were named as defendants in a putative class action lawsuit filed on October 28, 2016, in the United States District Court for the Southern District of New York. The complaint alleges that the defendants made statements in the Company's SEC filings and press releases, and other public statements, that were materially false and misleading in light of the Company's alleged, undisclosed violation of the federal antitrust laws described above. The complaint also alleges that the material misstatements were made in order to, among other things, “artificially inflate and maintain the market price of Sanderson Farms securities.” The complaint alleges the defendants thereby violated the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, and seeks damages, interest, costs and attorneys’ fees. The lawsuit is in its earliest stage and the defendants intend to defend it vigorously; however, the Company cannot predict the outcome of these actions. If the plaintiffs were to prevail, the Company could be liable for damages, which could have a material, adverse effect on our financial position and results of operations.
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. The 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 complaint also alleges that the defendants unlawfully conspired to not solicit or hire the broiler farmers who were providing services to other defendants. The complaint seeks treble damages, costs and attorneys’ fees. The lawsuit is in its early stages, and we intend to defend it vigorously. 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.
On February 21, 2017, Sanderson Farms, Inc. received an antitrust civil investigative demand from the Office of the Attorney General, Department of Legal Affairs, of the State of Florida. The Company intends to cooperate fully with the investigative demand. Among other things, the demand seeks information related to the Georgia Dock Index and other information on poultry and poultry products published by the Georgia Department of Agriculture and its Poultry Market News division. We are unable to predict the outcome of the investigative demand at this time.
The Company is involved in various other claims and litigation incidental to its business. Although the outcome of these matters cannot be determined with certainty, management, upon the advice of counsel, is of the opinion that the final outcome of currently pending matters, other than those discussed above, should not have a material effect on the Company’s consolidated results of operations or financial position.
The Company recognizes the costs of legal defense for the legal proceedings to which it is a party in the periods incurred. After a considerable analysis of each case, the Company determines the amount of reserves required, if any. At this time, the Company has not accrued any reserve for any matters. Future reserves may be required if losses are deemed reasonably estimable and probable due to changes in the Company’s assumptions, the effectiveness of legal strategies, or other factors beyond the Company’s control. Future results of operations may be materially affected by the creation of reserves or by accruals of losses to reflect any adverse determinations in these legal proceedings.
Item 1A.
Risk Factors
In addition to the other information set forth in this quarterly report, you should carefully consider the risks discussed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2016 , including under the heading “Item 1A: Risk Factors”, which, along with risks described in this report, are risks we believe could materially affect the Company’s business, financial condition and future results. These are not the only risks facing the Company. Other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect the Company’s business, financial condition and future results. Risks we have identified but currently deem to be immaterial could still materially adversely affect the Company’s business, financial condition and future results if our assumptions with respect to such risks prove incorrect or if circumstances change.
There have been no material changes from the risk factors previously disclosed in the Company's Form 10-K for the fiscal year ended October 31, 2016 .
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

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During the first quarter of fiscal 2017 , the company repurchased shares of its common stock as follows:
Period
(a) Total Number of
Shares Purchased 1
 
(b) Average Price
Paid per Share
 
(c) Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or
Programs 2
 
(d) Maximum
Number (or
Approximate Dollar
Value) of Shares that
May Yet Be
Purchased Under the
Plans or Programs 3
Nov. 1 - Nov. 30, 2016
19,556

 
$
91.61

 
19,556

 
1,000,000

Dec. 1 - Dec. 31, 2016
1,859

 
94.14

 
1,859

 
1,000,000

Jan. 1 - Jan. 31, 2017

 

 

 
1,000,000

Total
21,415

 
$
91.83

 
21,415

 
1,000,000

___________________
1
All purchases were made pursuant to the Company’s Stock Incentive Plan, as amended and restated on February 11, 2016, under which shares were withheld to satisfy tax withholding obligations.
2
On April 23, 2015, the Company’s Board of Directors expanded and extended the share repurchase program originally approved on October 22, 2009, under which the Company may purchase up to one million shares of its common stock in open market transactions or negotiated purchases, subject to market conditions, share price and other considerations. The authorization will expire on April 23, 2018. The Company’s repurchase of vested restricted stock to satisfy tax withholding obligations of its Stock Incentive Plan participants will not be made under the 2015 general repurchase plan.
3
Does not include vested restricted shares that may yet be repurchased under the Stock Incentive Plan as described in Note 1. In March 2015, the Company repurchased 700,003 shares of its common stock in open market transactions, and on April 23, 2015, the Company's Board of Directors expanded the share repurchase program by 700,003 shares to authorize the repurchase of up to 1,000,000 additional shares.

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Item 6.
Exhibits
The following exhibits are filed with this report.
Exhibit 3.1 Restated Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 3.1 filed with the Registrant's Quarterly Report on Form 10-Q for the Quarter ended on July 31, 2015.)
Exhibit 3.2 Bylaws of the Registrant, amended and restated as of February 13, 2014. (Incorporated by reference to Exhibit 3 filed with the Registrant’s Current Report on Form 8-K on February 20, 2014.)
Exhibit 10.1+ Sanderson Farms, Inc. Bonus Award Program Effective November 1, 2016. (Incorporated by reference to Exhibit 10 filed with the Registrant's Current Report on Form 8-K on January 24, 2016.)
Exhibit 10.2+* Fourth Amendment to the Sanderson Farms, Inc. and Affiliates Employee Stock Ownership Plan dated as of January 19, 2017.

Exhibit 15* Accountants’ Letter re: Unaudited Financial Information.
Exhibit 31.1* Certification of Chief Executive Officer.
Exhibit 31.2* Certification of Chief Financial Officer.
Exhibit 32.1** Section 1350 Certification.
Exhibit 32.2** Section 1350 Certification.
Exhibit 101.INS XBRL Instance Document
Exhibit 101.SCH XBRL Taxonomy Extension Schema
Exhibit 101.CAL XBRLTaxonomy Extension Calculation Linkbase
Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase
Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase
Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase
___________________
*
Filed herewith.
**
Furnished herewith.
+
Management contract or compensatory plan or arrangement.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
SANDERSON FARMS, INC.
 
(Registrant)
 
 
 
Date: February 23, 2017
By:
/s/ D. Michael Cockrell
 
 
Treasurer and Chief Financial Officer
 
 
 
Date: February 23, 2017
By:
/s/ Tim Rigney
 
 
Secretary, Corporate Controller and
 
 
Chief Accounting Officer


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INDEX TO EXHIBITS
Exhibit
Number
 
Description of Exhibit
 
 
 
3.1
 
Restated Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 3.1 filed with the Registrant's Quarterly Report on Form 10-Q for the Quarter ended on July 31, 2015.)
 
 
 
3.2
 
Bylaws of the Registrant amended and restated as of February 13, 2014. (Incorporated by reference to Exhibit 3 filed with the Registrant’s Current Report on Form 8-K on February 20, 2014.)
 
 
 
10.1+
 
Sanderson Farms, Inc. Bonus Award Program Effective November 1, 2016. (Incorporated by reference to Exhibit 10 filed with the Registrant's Current Report on Form 8-K on January 24, 2016.)
 
 
 
10.2+*
 
Fourth Amendment to the Sanderson Farms, Inc. and Affiliates Employee Stock Ownership Plan dated as of January 19, 2017.
 
 
 
15*
 
Accountants’ Letter re: Unaudited Financial Information.
 
 
 
31.1*
 
Certification of Chief Executive Officer
 
 
 
31.2*
 
Certification of Chief Financial Officer
 
 
 
32.1**
 
Section 1350 Certification.
 
 
 
32.2**
 
Section 1350 Certification.
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.DEF
 
XBRL Taxonomy Definition Linkbase
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
___________________
*
Filed herewith.
**
Furnished herewith.
+
Management contract or compensatory plan or arrangement.

27

Exhibit 10.2

FOURTH AMENDMENT TO THE
SANDERSON FARMS, INC. AND AFFILIATES
EMPLOYEE STOCK OWNERSHIP PLAN
THIS FOURTH AMENDMENT is made and entered into by Sanderson Farms, Inc. (the “Corporation”) as set forth herein.
WHEREAS, the Corporation maintains the Sanderson Farms, Inc. and Affiliates Employee Stock Ownership Plan (the “Plan”); and
WHEREAS, the Corporation desires to amend the Plan to clarify provisions regarding references to the Administrative Committee and hardship distributions and to revise provisions on legal actions related to the Plan.
NOW, THEREFORE, pursuant to the provisions of Section 12.1 of the Plan, the Plan is hereby amended, effective as set forth herein, as follows:
1. Effective as of November 1, 2016, Section 2.2 is revised to read as follows:
“Administrative Committee” means the Administrative Committee appointed by the Company as provided in Section 10.1 hereof. The persons constituting the Administrative Committee are herein referred to as “Administrative Committee Members.” References in this Plan to the Administrative Committee shall include references to its designees, as applicable, if the Administrative Committee has delegated its responsibilities to such designees.
2. Effective as of November 1, 2016, Section 7.9(a) is revised to read as follows:
A Participant who is an Employee and is fully vested in his Accounts may make written application to withdraw all or part of the Participant's Account balances. Such an application shall be approved only if the Administrative Committee shall determine that the withdrawal is necessary to satisfy an immediate and heavy financial need of the Participant. Distribution of such withdrawal shall be made to the Participant in a lump sum payment of whole shares of Qualifying Employer Securities, plus cash for fractional shares, as soon as practicable after the withdrawal is approved by the Administrative Committee.
3. Effective as of January 1, 2017, Section 13.13 is added as follows:
Section 13.13 Restriction on Venue . A Participant or Beneficiary may bring an action in connection with the Plan only in the Hattiesburg Division of the United States District Court for the Southern District of Mississippi. This court shall have exclusive jurisdiction over any such action.
4. Except as otherwise provided in this Fourth Amendment, the provisions of the Plan shall remain in full force and effect.

7/3907223.3
0S0187-066481


Exhibit 10.2


IN WITNESS WHEREOF , the undersigned has executed this Fourth Amendment to the Plan on this 19th day of January , 2017, effective as set forth herein.

SANDERSON FARMS, INC.

                    

By: /s/ D. Michael Cockrell

7/3907223.3
0S0187-066481


EXHIBIT 15
ACCOUNTANTS’ LETTER RE: UNAUDITED FINANCIAL INFORMATION
The Board of Directors and Stockholders
Sanderson Farms, Inc.
We are aware of the incorporation by reference in the Registration Statements (Form S-8 No. 33-67474 and Form S-8 No. 333-92412) pertaining to the Sanderson Farms, Inc. and Affiliates Stock Option Plan, the Registration Statements (Form S-8 No. 333-123099, Form S-8 No. 333-172315 and Form S-8 No. 333-209481) pertaining to the Sanderson Farms, Inc. and Affiliates Stock Incentive Plan, and the Registration Statement (Form S-3 No. 333-199220) of our report dated February 23, 2017 relating to the unaudited condensed consolidated interim financial statements of Sanderson Farms, Inc. that are included in its Form 10-Q for the quarter ended  January 31, 2017 .
/s/ Ernst and Young LLP
New Orleans, Louisiana
February 23, 2017




EXHIBIT 31.1
CERTIFICATION
I, Joe F. Sanderson, Jr., certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of Sanderson Farms, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
  
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
February 23, 2017

 
/s/ Joe F. Sanderson, Jr.
Chief Executive Officer and
Chairman of the Board




EXHIBIT 31.2
CERTIFICATION
I, D. Michael Cockrell, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of Sanderson Farms, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
  
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
February 23, 2017
 
 
/s/ D. Michael Cockrell
Treasurer and Chief Financial Officer




EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. 1350
In connection with the Quarterly Report of Sanderson Farms, Inc. (the “Company”) on Form 10-Q for the quarter ended January 31, 2017 (the “Report”), I, Joe F. Sanderson, Chairman and Chief Executive Officer of the Company, certify that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
/s/ Joe F. Sanderson, Jr.
Joe F. Sanderson, Jr.
Chief Executive Officer and
Chairman of the Board
February 23, 2017




EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. 1350
In connection with the Quarterly Report of Sanderson Farms, Inc. (the “Company”) on Form 10-Q for the quarter ended January 31, 2017 (the “Report”), I, D. Michael Cockrell, Treasurer and Chief Financial Officer of the Company, certify that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
/s/ D. Michael Cockrell
D. Michael Cockrell
Treasurer and Chief Financial Officer
February 23, 2017