UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

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DURING THE PRECEDING FIVE YEARS:

INDEX

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except number of shares)

See notes to condensed consolidated financial statements.

SANDERSON FARMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share amounts)

See notes to condensed consolidated financial statements.

SANDERSON FARMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

See notes to condensed consolidated financial statements.

SANDERSON FARMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1—ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated balance sheet at October 31, 2017 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, reference is made to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for its fiscal year ended October 31, 2017.

New Accounting Pronouncements

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which amends the requirements related to accounting for changes to stock compensation awards. The guidance is effective for interim and annual periods beginning after December 15, 2017, our fiscal 2019. Early adoption is permitted. The impact this guidance will have on our consolidated financial statements will depend on the nature and extent of future changes, if any, to the terms and conditions of the Company's Stock Incentive Plan.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost. The guidance requires the service cost component of defined benefit pension plans and other post-retirement benefit plans to be reported in the same line item or items as other compensation costs arising from the services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be reported outside of operating income. The guidance is effective for interim and annual periods beginning after December 15, 2017, our

During the threenine months ended JanuaryJuly 31, 2018, participants in the Company’s Management Share Purchase Plan (MSPP)("MSPP") elected to receive a total of 4,6248,749 shares of restricted stock at an average price of $142.25$127.93 per share instead of a specified percentage of their cash compensation, and the Company issued 1,1162,101 matching restricted shares. During the three and nine months ended JanuaryJuly 31, 2018, the Company recorded compensation expense for the MSPP shares, included in the total stock based compensation expense above, of $62,000$46,000 and $211,000, respectively, as compared to $60,000$99,000 and $297,000 during the three and nine months ended JanuaryJuly 31, 2017.2017, respectively.

During fiscal 2018, 2017 and 2016, 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

The target number of shares specified in the performance share agreements entered intoexecuted on November 1, 2017 totaled 53,850. As of JanuaryJuly 31, 2018, the Company could not determine that achievement of the applicable performance based criteria is probable due to the uncertainties discussed above, and therefore recorded no compensation expense related to those agreements.

The Company also has performance share agreements in place with certain officers and key employees that were entered into on November 1, 2016. During the quarter ended January 31, 2018, the Company determined that achievement of the applicable performance based criteria for the November 1, 2016 agreements is probable at a level between the target and maximum levels. Accordingly, because the accrual is made using the cumulative catch-up method, the quarterthree and nine months ended JanuaryJuly 31, 2018 includesinclude compensation expense of $3.3$0.4 million and $5.2 million, respectively, as compared to no compensation expense recorded during the quarterthree and nine months ended JanuaryJuly 31, 2017 related to the agreements entered into on November 1, 2016. As of JanuaryJuly 31, 2018, the aggregate number of shares estimated to be awarded related to the performance share agreements entered into on November 1, 2016 totaled 87,13897,763 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 ninethree months of the performance period ending October 31, 2018, and due to potential forfeitures. The Company will recognize the remaining unearned compensation related to these shares over the remaining service period.

The Compensation Committee of the Company's Board of Directors has determined that the performance share agreements entered into on November 1, 2015 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, 2018. Accordingly, the three and nine months ended JanuaryJuly 31, 2018 include compensation expense of $0.8 million and $2.5 million, respectively, related to those agreements, as compared to compensation expense of $3.3$1.2 million and $5.7 million, respectively, during the three and nine months ended JanuaryJuly 31, 2017. Because management'smanagment's initial determination of probability was made during the three months ended January 31, 2017, and because the accrual is made using the cumulative catch-up method, the compensation expense recorded during the first three months ended January 31,quarters of fiscal 2017 related to the agreements entered into on November 1, 2015 was greater than that recorded during the first quarterthree quarters of fiscal 2018. As of JanuaryJuly 31, 2018, the aggregate number of shares estimated to be awarded related to the performance share agreements entered into on November 1, 2015 totaled 145,741145,469 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 ninethree months of the service period ending October 31, 2018. The Company will recognize the remaining unearned compensation related to these shares over the remaining service period.

Had the Company determined that it was probable that the maximum amount of those outstanding awards from the agreements entered into on November 1, 2016 and November 1, 2017 would be earned, an additional $1.8 million and $1.3$4.0 million, respectively, would have been accrued as of JanuaryJuly 31, 2018.

The Company's compensation cost related to performance share agreements is summarized as follows (in thousands, except number of shares):

On November 1, 2017, the Company granted 53,850 shares of restricted stock to certain officers and key management employees. The restricted stock had a grant date fair value of $148.23 per share and will vest on November 1, 2021. On February 15, 2018, the Company granted an aggregate of 11,400 shares of restricted stock to all of its non-employee directors. The restricted stock had a grant date fair value of $131.61 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 JanuaryJuly 31, 2018 related to all unvested restricted stock grants totaled 282,854.282,156. During the three and nine months ended JanuaryJuly 31, 2018, the Company recorded compensation expense, included in the total stock based compensation expense above, of $2.0$1.8 million and $5.7 million,

respectively, related to restricted stock grants, as compared to $1.7$2.0 million and $5.3 million during the three and nine months ended JanuaryJuly 31, 2017.2017, respectively. The Company had $15.9$12.8 million in unrecognized share-based compensation costs as of JanuaryJuly 31, 2018, thatwhich will be recognized over a weighted average remaining vesting period of approximately 2 years, 51 year, 9 months.

The following table presentstables present earnings per share.

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 JanuaryJuly 31, 2018, and October 31, 2017, 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.

Property, Plant and Equipment

In March 2017, the Company announced the selection of sites in Lindale, Mineola and Smith County, Texas, for the construction of a new poultry processing complex. The completed complex will consist of a hatchery, feed mill, processing plant and waste water treatment facility. Construction commenced on this project during the fourth quarter of fiscal 2017, and initial operations of the completed complex are expected to begin during the first calendar quarter of 2019. The Company estimates the total investment in the complex will be approximately $200.5$225.0 million. As of JanuaryJuly 31, 2018, the Company has spent approximately $28.3 million on the project and has entered into commitments totaling approximately $220.0 million related to the new complex, totalingof which approximately $115.7 million.$107.6 million has been spent to date.

As of JanuaryJuly 31, 2018, the Company has outstanding commitments totaling $26.2$7.6 million related to purchase agreements for future delivery of aircraft. These commitments are expected to be paid as follows: $22.1$3.5 million during the remainder of fiscal 2018 and $4.1 million during fiscal 2019.

Litigation

Between December 8, 2017 and January 30,August 16, 2018, additional purported direct purchaserdirect-purchaser entities individually brought fourtwelve separate suits against 1617 poultry producers, including Sanderson Farms and Agri Stats, in the United States District Court for the Northern District of Illinois.Illinois and the United States District Court for the District of Kansas. These suits allege substantially similar claims to the direct purchaser class complaint described above andabove. Those filed in the Northern District of Illinois are now pending in front of the same judge. They are likely to move into discovery on the same or similar timelinejudge as the putative class action lawsuits. The parties are currently engaged in discovery. On June

Following the enactment of the Tax Act, the United States Securities and Exchange Commission issued guidance in Staff Accounting Bulletin 118 which provides the Company up to a one-year measurement period, beginning on the Tax Act's enactment date, in which to complete the required analysis and accounting for the effects of the Tax Act. The guidance allows the Company to record provisional adjustments related to the impacts of the Tax Act when the accounting for the effects of the Tax Act is incomplete, but when reasonable estimates can be made regarding the effects of the Tax Act. Our accounting for the Tax Act is not complete, because it required the Company to estimate the timing of settlement of the temporary differences from which our deferred taxes arose; however, we were able to make reasonable estimates, and we recorded those estimates as provisional adjustments as described in the paragraph below.adjustments. The Company will continue to monitor these estimates as we move through the measurement period. If any adjustments to the provisional amounts are required, those adjustments will be recorded in the period such new information becomes available.

The Company's estimated annual effective tax raterates for the first quarter of fiscalthree and nine months ended July 31, 2018 was (198.23)were 25.1% and (19.0)%, respectively, as compared to 32.61%34.6% and 34.5%, respectively, for the first quarter of fiscalthree and nine months ended July 31, 2017. The revaluation of our deferred taxes using the newly enacted tax rate resulted in a $37.5 million discrete income tax benefit or an approximately (218.4)% impact to the effective tax rate forrecognized during the first quarter of fiscal 2018. Additionally,There were no other material discrete items affecting the comparative periods. Excluding the effects of discrete items, the Company's estimated annual effective tax ratesrate for the first quarter of fiscalnine months ended July 31, 2018 and 2017, respectively, include approximately (4.2)% and (2.4)% favorable impacts related to excess tax benefits from share-based payments to employees. Excluding the impacts of the deferred tax revaluation and the excess tax benefits, the Company's effective tax rates for the first quarter of fiscal 2018 and 2017 would have been approximately 24.4% and24.6%, as compared to approximately 35.0%, respectively. for the nine months ended July 31, 2017, which is primarily due to the aforementioned decrease to the statutory federal income tax rate as a result of the enactment of the Tax Act.

The Board of Directors and Stockholders

We have reviewed the condensed consolidated balance sheet of Sanderson Farms, Inc. and subsidiaries as of JanuaryJuly 31, 2018, and the related condensed consolidated statements of operations for the three-month and nine-month periods ended July 31, 2018 and 2017 and the condensed consolidated statements of cash flows for the three-monthnine-month periods ended JanuaryJuly 31, 2018 and 2017. These financial statements are the responsibility of the Company’sCompany'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, 2017, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended not(not presented hereinherein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated December 14, 2017. In our opinion, the accompanying condensed consolidated balance sheet of Sanderson Farms, Inc. and subsidiaries as of October 31, 2017, 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

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:

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 growth plans, future earnings, production levels, capital expenditures, grain prices, global economic conditions, supply and demand factors and other industry conditions.

In March 2017, the Company announced the selection of sites in Lindale, Mineola and Smith County, Texas, for the construction of a new poultry processing complex. The completed complex will consist of a hatchery, feed mill, processing plant and waste water treatment facility with the capacity to process 1.251.3 million chickens per week. We are in the early stages of construction,Construction is underway, and initial operations of the new complex are expected to begin during the first calendar quarter of 2019. Before the complex can become operational and reach full capacity, we will need to obtain the necessary licenses and permits, enter into construction contracts, 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, 2017.

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 JanuaryJuly 31, 2018, was $1,007.2$1,030.9 million. The credit is unsecured and, unless extended, will expire on April 28, 2022. As of JanuaryJuly 31, 2018, and February 20,August 22, 2018, the Company had no outstanding draws under the facility, and had approximately $23.5$21.4 million outstanding in letters of credit, leaving $876.5$878.6 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 May 4, 2017 and Item 1.01 of our Current Report on Form 8-K filed November 29, 2017, which are incorporated herein by reference.reference, and Exhibit 10.1 filed with this Quarterly Report on Form 10-Q.

Poultry Cost of Sales

(In thousands, except per pound data)

Note (1) - For comparative purposes, includes the costs and pounds of product sold to the Company's prepared chicken plant.

Other costscost of sales of poultry products includeconsists primarily of labor, packaging, freight, maintenance and repairs, utilities, antimicrobial interventions, contract grower pay, packaging, freightchick costs and certain fixed costs, among other costs. These non-feed related costs of poultry products sold increased by $0.0188$0.0140 per pound processed, or 5.4%3.8%, during this year’s firstthird fiscal quarter compared to the same quarter a year ago,ago. During the third quarter of fiscal 2017, other costs of sales of poultry products include approximately $8.2

million of expenses related to the Company's bonus award program, as compared to no such expenses during the third quarter of fiscal 2018. Excluding those bonus-related expenses, other cost of sales of poultry products increased by $0.0217 per pound processed, or 6.1%, during the third quarter of fiscal 2018 compared to the same period a year ago. This increase is primarily attributable to higher labor, contract grower pay, antimicrobial interventions, maintenance and repairs, and freight and fixedcosts. These higher costs across our operations,were partially offset by efficiencies realized at the Company's new St. Pauls, North Carolina facilities, which were in the early stages of initial operations during the firstthird quarter of fiscal 2017 and operating at nearreached full capacity during the first quarter of fiscalApril 2018. Excluding the St. Pauls facilities and bonus-related expenses, other costs of sales would have increased by $0.0264approximately $0.0364 per pound processed, or 7.7%10.3%.

year ago. This increase is primarily attributable to higher labor, contract grower pay, antimicrobial interventions, maintenance and repairs, and freight costs, along with higher fixed costs across our operations. These higher costs were partially offset by efficiencies realized at the Company's new St. Pauls, North Carolina facilities, which were in the early stages of operations during the first nine months of fiscal 2017 and reached full capacity during April 2018. Excluding the St. Pauls facilities and bonus-related expenses, other costs of sales would have increased by approximately $0.0335 per pound processed, or 9.7%.

Costs of sales of the Company’s prepared chicken products during the first quarternine months of fiscal 2018 were $35.2$137.4 million as compared to $35.4$115.6 million during the same quarterperiod a year ago, a decreasean increase of $0.2$21.9 million, or 0.4%18.9%, primarily attributable to a 0.9% decrease16.2% increase in the pounds of prepared chicken sold and a 3.1% decrease in the costs per pound of raw material purchases, partially offset by a 12.9% increase in processing costs per pound. The increase in processing costs per pound is primarily attributable to a 4.5% decrease in the Company's prepared chicken pounds processed compared to the first quarter of fiscal 2017.sold.

The Company recorded the value of live broiler inventories on hand at JanuaryJuly 31, 2018 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 marketnet realizable value. No such charge was required at JanuaryJuly 31, 2018 or JanuaryJuly 31, 2017.

Selling, general and administrative ("SG&A") costs during the threethird quarter of fiscal 2018 were $55.8 million, a decrease of $6.3 million compared to the $62.0 million during the third quarter of fiscal 2017. SG&A costs during the nine months ended JanuaryJuly 31, 2018 were $52.6$163.4 million, an increase of $6.5$11.6 million compared to the $46.1$151.7 million during the threenine months ended JanuaryJuly 31, 2017. The following table includestables include the components of SG&A costs for the three and nine months ended JanuaryJuly 31, 2018 and 2017.

Selling, General and Administrative Costs

(in thousands)

Regarding both tables above, the decrease in bonus expense, payouts of which are based on profitability, is the result of management determining that it is probable that fiscal 2018 earnings will not reach levels that will allow payouts of the incentive. During the third quarter of fiscal 2017, management determined that fiscal 2017 earnings would be at levels that would allow a payout, and accrued that expense accordingly. The increasesdecrease in traineeESOP expense, and administrative salariespayouts of which are primarilybased on profitability, is attributable to increasesthe difference in personnelthe level of profitability that coincide withmanagement deems probable for fiscal 2018 and the Company's current and future growth plans,level of profitability that management deemed probable for fiscal 2017 as well as wage increases.of the third quarter. The increase in legal expense is primarily attributable to our ongoing defense of the litigation described in "Part II. Other Information, Item 1. Legal Proceedings" of this Form 10-Q. 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 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 increases in trainee expense and administrative salaries are primarily attributable to increases in personnel that coincide with the Company's current and future growth plans, as well as wage increases. The increase in all other SG&A expenses is the result of a net increase in various other categories of SG&A costs.

The Company’s operating income for the three and nine months ended JanuaryJuly 31, 2018 was $17.3$15.1 million and $87.4 million, respectively, as compared to operating income for the three and nine months ended JanuaryJuly 31, 2017 of $35.9 million.$177.3 million and $316.3 million, respectively. The decrease in operating income for the three months ended JanuaryJuly 31, 2018, as compared to the same period a year ago, resulted primarily from a 1.7% decrease inlower average selling prices per pound and a 1.6% increase inhigher average costs of goods sold, per pound, partially offset by a 14.0%6.0% increase in pounds sold.sold during the same comparative period. The decrease in operating income for the nine months ended July 31, 2018, as compared to the same period a year ago, resulted primarily from lower average selling prices and higher average costs of goods sold, partially offset by an 7.6% increase in pounds sold during the same comparative period.

Interest income during the third quarter and first quarternine months of fiscal 2018 was $0.4$0.7 million and $2.1 million, respectively, as compared to $0.2$0.3 million and $0.8 million, respectively, during the same period a year ago.third quarter and first nine months of fiscal 2017. Interest expense during the third quarter and first quarternine months of fiscal 2018 was $0.5 million and $1.5 million, respectively, as compared to $0.4$0.5 million and $1.4 million, respectively, during the same period a year ago.third quarter and first nine months of fiscal 2017.

The Company’s estimated annual effective tax raterates for the three and nine months ended JanuaryJuly 31, 2018 was (198.2)were 25.1% and (19.0)%, respectively, as compared to 32.6%34.6% and 34.5%, respectively, for the three and nine months ended JanuaryJuly 31, 2017. As described in our financial statement footnote "Note 8 - Income Taxes," the revaluation of our deferred taxes using the newlytax rate enacted tax rateduring our first quarter of fiscal 2018 resulted in a $37.5 million discrete income tax benefit or an approximately (218.4)% impact to the effective tax rate forrecognized during the first quarter of fiscal 2018. Additionally,There were no other material discrete items affecting the comparative periods. Excluding the effects of discrete items, the Company's estimated annual effective tax rates for the first quarter of fiscal 2018 and 2017, respectively, include approximately (4.2)% and (2.4)% favorable discrete impacts related to excess tax benefits from share-based payments to employees. Excluding the impacts of these discrete items, the Company's effective tax rates for the first quarternine months of fiscal 2018 and 2017 would have been approximately 24.4%24.6% and 35.0%, respectively. The Company estimates its effective tax rate for the full fiscal year 2018, exclusive of discrete items, will be approximately 24.4%24.6%.

As of JanuaryJuly 31, 2018, the Company's long-term deferred income tax liability was $57.9$68.0 million as compared to $91.9 million at October 31, 2017, a decrease of $34.0$23.9 million. This decrease is attributable to the revaluation of our deferred tax assets and liabilities, as U.S. GAAP requires that deferred tax assets and liabilities be measured using the enacted tax rate expected to apply when the temporary differences from which the deferred taxes arose are expected to be settled. Prior to the enactment of the Tax Cuts and Jobs Act, our deferred taxes were measured using the enacted 35% federal income tax statutory rate. Following enactment, we remeasured our deferred taxes using a 23.3% blended federal income tax statutory rate for temporary differences expected to reverse in fiscal 2018 and a 21% federal income tax statutory rate for temporary differences expected to reverse after fiscal 2018.

The Company’s cash position at JanuaryJuly 31, 2018 and October 31, 2017 consisted of $388.9$288.3 million and $419.3 million, respectively, in cash and short-term cash investments. The Company’s ability to invest cash is limited by covenants in its revolving credit agreement to short termshort-term investments. All of the Company’s cash at JanuaryJuly 31, 2018 and October 31, 2017 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 operating activities during the threenine months ended JanuaryJuly 31, 2018 and 2017, were $25.0$103.9 million and $39.5$310.1 million, respectively. Cash flows from operating activities decreased by $14.5$206.2 million, resulting primarily from a decrease in market prices for poultry products during the first nine months of fiscal 2018, as compared to the same period in fiscal 2017, in addition to an increase in cash bonuses paid by the Company, which weretotaled approximately $36.0 million during the first quarternine months of fiscal 2018, as compared to $0.4 million during the first quarternine months of 2017, partially offset by a decrease in cashfiscal 2017. The bonuses paid for income taxes. During the first quarter of 2017, the Company paid approximately $19.9 million in income taxes, but did not pay any income taxes during the first quarternine months of 2018.fiscal 2018 related to fiscal 2017 performance, and the bonuses paid during the first nine months of fiscal 2017 related to fiscal 2016 performance.

Cash flows used in investing activities during the first threenine months of fiscal 2018 and 2017 were $51.2$215.7 million and $46.0$130.2 million, respectively. The Company’s capital expenditures during the first threenine months of fiscal 2018 were approximately $51.7$216.6 million, and included approximately $15.0$94.3 million related to construction at the Tyler, Texas complex, and $10.0approximately $29.3 million related to progress or final payments made under purchase agreements for delivery or future delivery of new aircraft as described below. Capital expenditures for the first threenine months of fiscal 2017 were $46.3$130.6 million, including approximately $14.0$25.4 million related to construction at the St. Pauls, North Carolina complex and approximately $24.0 million related to progress payments made under the aircraft purchase agreements, and approximately $11.7 million related to construction at the St. Pauls, North Carolina complex.agreements.

Cash flows used in financing activities during the threenine months ended JanuaryJuly 31, 2018 and 2017 were $4.2$19.2 million and $1.8$15.8 million, respectively. TheDuring the first nine months of fiscal 2018, the Company made no changepaid approximately $14.6 million in dividends to its shareholders, as compared to approximately $10.9 million during the first nine months of fiscal 2017. Additionally, during the first nine months of fiscal 2018, the Company paid approximately $5.7 million to repurchase shares pursuant to the net outstanding borrowingsCompany's Stock Incentive Plan, under which shares may be withheld upon vesting to satisfy tax withholding obligations, as compared to approximately $3.2 million during the first nine months of fiscal 2017. Lastly, the Company paid approximately $2.4 million in costs to renegotiate its revolving credit facility in eitherduring the first nine months of fiscal 2017, as compared to no such expenditures during the comparative periods.first nine months of fiscal 2018.

As of February 18,August 19, 2018, the Company’s capital budget for fiscal 2018, excluding operating leases, is expected to be approximately $345.6$373.9 million. The Company expects the 2018 capital budget to 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 $876.5 million available under the revolving line of credit at January 31, 2018. The fiscal 2018 capital budget includes approximately $178.0 million for construction of the Company's new Tyler, Texas complex, approximately $32.2 million for progress payments due under purchase agreements for future delivery of new aircraft as described below, approximately $37.3$38.0 million combined for multiple large-scale equipment upgrades and corresponding building upgrades at multiple complexes further described below and approximately $4.2 million to complete the expansion of the Company's existing prepared chicken facility in Flowood, Mississippi. Excluding the budgets for the projects detailed above, the fiscal 2018 capital budget is approximately $93.9$121.5 million. These amounts are estimates and are subject to change as we move through fiscal 2018.

The Company has entered into threeis a party to two separate purchase agreements for threetwo new aircraft to be delivered at different dates during fiscal 2018 and 2019. 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 progress payments, with final paymentspayment due upon delivery of each aircraft. Under a separate purchase agreement akin to the two that remain open, the Company took delivery of a new aircraft during the second quarter of fiscal 2018 and accordingly made final payment on that aircraft. To date, the Company has made payments totaling $39.0

In March 2017, the Company announced the selection of sites in Lindale, Mineola and Smith County, Texas, for the construction of a new poultry processing complex. The completed complex will consist of a hatchery, feed mill, processing plant and waste water treatment facility with the capacity to process 1.251.3 million chickens per week. We are in the early stages of construction,Construction is underway, and initial operations of the new complex are expected to begin during the first calendar quarter of 2019. Before the complex can become operational and reach full capacity, we will need to obtain the necessary licenses and permits, enter into construction contracts, 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, 2017.

On October 2, 2017, the Company filed a shelf registration statement on Form S-3 to register for possible future sale shares of the Company's common and/or preferred stock. An indeterminate amount of common stock and preferred stock may be offered by the Company in amounts, at prices and on terms to be determined by the board of directors if and when shares are issued. The registration statement became automatically effective upon filing with the SEC on October 2, 2017.

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.

Revolving Credit Facility

Under the credit facility, the Company may not exceed a maximum debt to total capitalization ratio of 50%. The Company has a one-time right, at any time during the term of the agreement, to increase the maximum debt to total capitalization ratio then in

effect by five percentage points in connection with the construction of any of the three aforementioned new complexes 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 JanuaryJuly 31, 2018, was $1,007.2$1,030.9 million. The credit is unsecured and, unless extended, will expire on April 28, 2022. As of JanuaryJuly 31, 2018, and February 20,August 22, 2018, the Company had no outstanding draws under the facility, and had approximately $23.5$21.4 million outstanding in letters of credit, leaving $876.5$878.6 million of borrowing capacity available under the facility. For more

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, 2017.

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which amends the requirements related to accounting for changes to stock compensation awards. The guidance is effective for interim and annual periods beginning after December 15, 2017, our fiscal 2019. Early adoption is permitted. The impact this guidance will have on our consolidated financial statements will depend on the nature and extent of future changes, if any, to the terms and conditions of the Company's Stock Incentive Plan.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost. The guidance requires the service cost component of defined benefit pension plans and other post-retirement benefit plans to be reported in the same line item or items as other compensation costs arising from the services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be reported outside of operating income. The guidance is effective for interim and annual periods beginning after December 15, 2017, our fiscal 2019. Early adoption is permitted. We do not expect adoption to have a material effect on our consolidated financial statements.

Generally, the Company commits to purchase feed ingredients for deferred delivery from one month to nine months after the time of the commitment. 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. The Company sometimes purchases its feed ingredients for prompt delivery to its feed mills at market prices at the time of such purchases. 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:

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 firstthird quarter of fiscal 2018, the Company purchased approximately 28.830.5 million bushels of corn and approximately 264,575283,611 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 $28.8$30.5 million in the firstthird quarter of fiscal 2018. Likewise, a $10.00 change in the price paid per ton for soybean meal would affect the Company’s cash outlays by approximately $2.6$2.8 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.

During the firstthird quarter of fiscal 2018, the Company’s average feed cost per pound of broilers processed totaled $0.2446$0.2655 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 $0.0265, based on the quantity of grain used during the firstthird quarter of fiscal 2018. 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 $0.0024 during the firstthird quarter of fiscal 2018.

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 firstthird quarter of fiscal 2018:

Typically, theThe Company’s interest expense is sensitive to changes in the general level of interest rates in the United States, and when the Company is indebted, it typically maintains certain of its debt as fixed rate in nature to mitigate the impact of fluctuations in interest rates. At JanuaryJuly 31, 2018 the Company had no outstanding debt on its balance sheet.

As of JanuaryJuly 31, 2018, 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 JanuaryJuly 31, 2018.

There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended JanuaryJuly 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Between December 8, 2017 and January 30,August 16, 2018, additional purported direct purchaserdirect-purchaser entities individually brought fourtwelve separate suits against 1617 poultry producers, including Sanderson Farms and Agri Stats, in the United States District Court for the Northern District of Illinois.Illinois and the United States District Court for the District of Kansas. These suits allege substantially similar claims to the direct purchaser class complaint described above andabove. Those filed in the Northern District of Illinois are now pending in front of the same judge. They are likely to move into discovery on the same or similar timelinejudge as the putative class action lawsuits. The parties are currently engaged in discovery. On June 26, 2018, the defendants filed a motion to transfer the case filed in the District of Kansas to the Northern District of Illinois. That motion is still pending. It is possible additional individual actions may be filed.

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. On March 30, 2017, the lead plaintiff filed an amended complaint adding Lampkin Butts, director, Chief Operating Officer, and President, as a defendant, and on June 15, 2017, the lead plaintiff filed a second amended complaint. The complaint alleges that the defendants made statements in the Company'sCompany’s SEC filings and press releases, and other public statements, that were materially false and misleading in light of the Company'sCompany’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, for the individual defendants, Section 20(a) of the Exchange Act, and seeks damages, interest, costs and attorneys’ fees. On January 19, 2018, the Court granted the defendants'defendants’ motion to dismiss and entered judgment for the defendants. On January 31, 2018, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Second Circuit.Circuit, and the case is scheduled for argument on August 31, 2018. The Company cannot predict the outcome of this action or the appeal. If the plaintiffs were to prevail in the action, the Company could be liable for damages, which could have a material, adverse effect on our financial position and results of operations.

On January 30, 2017, the Company received a letter from a putative shareholder demanding that the Company take action against current and/or former officers and directors of the Company for alleged breach of their fiduciary duties. The shareholder asserted that the officers and directors (i) failed to take any action to stop the alleged antitrust conspiracy described above, despite their alleged knowledge of the conspiracy, and (ii) made and/or caused the Company to make materially false and misleading statements by failing to disclose the alleged conspiracy. The shareholder also asserted that certain directors engaged in “insider sales” from which they improperly benefited. The shareholder also demanded that the Company adopt unspecified corporate governance improvements. On February 9, 2017, pursuant to statutory procedures available in connection with demands of this type, the Company’s board of directors appointed a special committee of qualified directors to determine, after conducting a reasonable inquiry, whether it is in the Company’s best interests to pursue any of the actions asserted in the shareholder’s letter. On April 26, 2017, the special committee reported to the Company’s board of directors its determination that it is not in the Company’s best interests to take any of the demanded actions at this time, and that no governance improvements related to the subject matter of the demand are needed at this time. On May 5, 2017, the special committee’s counsel informed the shareholder’s counsel of the committee’s determination. As of the date of filing of this report, and to the Company’s knowledge, no legal proceedings related to the shareholder’s demand have been filed. However, we are voluntarily disclosing the existence of the shareholder demand in light of its relationship to the putative antitrust and securities class action lawsuits described above.

On January 27, 2017, Sanderson Farms, Inc. and our subsidiaries were named as defendants, along with four other poultry producers and certain of their affiliated companies, in a putative class action lawsuit filed in the United States District Court for the Eastern District of Oklahoma. On March 27, 2017, Sanderson Farms, Inc. and our subsidiaries were named as defendants, along with four other poultry producers and certain of their affiliated companies, in a second putative class action lawsuit filed in the United States District Court for the Eastern District of Oklahoma. The courtCourt ordered the suits consolidated into one proceeding, and on July 10, 2017, the plaintiffs filed a consolidated amended complaint. The consolidated amended complaint alleges that the defendants unlawfully conspired by sharing data on compensation paid to broiler farmers, with the purpose and effect of suppressing the farmers’ compensation below competitive levels. The consolidated amended complaint also alleges that the defendants unlawfully conspired to not solicit or hire the broiler farmers who were providing services to other defendants. The consolidated amended complaint seeks treble damages, costs and attorneys’ fees. On September 8, 2017, the defendants filed a motion to dismiss the amended complaint, on October 23, 2017, the plaintiffs filed their response, and on November 22, 2017, the defendants filed a reply. On January 19, 2018, the Court granted the defendants'Sanderson Farms defendants’ motion to dismiss for lack of personal jurisdiction. The motion to dismiss the complaint filed in the Eastern District of Oklahoma on its merits is pending as to the remaining defendants. On February 2,21, 2018, the plaintiffs filed a letter with the Court stating their intention to file a substantially similar complaintlawsuit in United States District Court for the Eastern District of North Carolina against Sanderson Farms and our subsidiaries and another poultry producer. Defendants subsequently moved to consolidate this action with the Eastern District of Oklahoma action in a judicial districtthe Eastern District of Oklahoma for pre-trial proceedings, which was denied. On July 13, 2018, the defendants moved to dismiss the lawsuit in which both personal jurisdiction and venue would be proper. Should the plaintiffs file another complaint, weEastern District of North Carolina. That motion is pending. We intend to defend itthis case vigorously; however, the Company cannot predict the outcome of this action. If the plaintiffs were to prevail, the Company could be liable for damages, which could have a material, adverse effect on our financial position and results of operations.

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 has determined that no accrual is required for any of the foregoing matters as of JanuaryJuly 31, 2018. 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.

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