UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(MARK ONE)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

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 þ   No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer as defined in Rule 12b-2 of the Exchange Act.

Large Accelerated filer o   Acclerated filer þ   Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No þ

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 o   No o

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 Per Share: Par Value shares 20,109,009 outstanding as of January 31, 2007.

 

 

INDEX

SANDERSON FARMS, INC. AND SUBSIDIARIES

PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
		Condensed consolidated balance sheets—January 31, 2007 and October 31, 2006
		Condensed consolidated statements of operations—Three months ended January 31, 2007 and 2006
		Condensed consolidated statements of cash flows—Three months ended January 31, 2007 and 2006
		Notes to condensed consolidated financial statements—January 31, 2007
		Report of Independent Registered Public Accounting Firm
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosures About Market Risk
Item 4.		Controls and Procedures
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings
Item 1A.		Risk Factors
Item 6.		Exhibits
SIGNATURES
Ex-15 Accountants' Letter re: Unaudited Financial Information
Ex-31.1 Section 302 Certification of the CEO
Ex-31.2 Section 302 Certification of the CFO
Ex-32.1 Section 906 Certification of the CEO
Ex-32.2 Section 906 Certification of the CFO

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

		January 31,				October 31,
		2007				2006
		(Unaudited)				(Note 1)
		(In thousands)
Assets
Current assets:
Cash and cash equivalents		$	906			$	7,396
Accounts receivable, net			53,170				40,930
Refundable income taxes			17,199				14,402
Inventories			104,632				96,490
Prepaid expenses and other current assets			16,429				13,179
Total current assets			192,336				172,397
Property, plant and equipment			605,353				573,422
Less accumulated depreciation			(270,236	)			(263,112	)
			335,117				310,310
Other assets			2,145				2,360
Total assets		$	529,598			$	485,067
Current liabilities:
Accounts payable and accrued expenses		$	71,698			$	55,081
Current maturities of long-term debt			4,440				4,433
Total current liabilities			76,138				59,514
Long-term debt, less current maturities			111,933				77,078
Claims payable			3,200				3,200
Deferred income taxes			13,930				16,935
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 — 20,109,009 and 20,094,571 at January 31, 2007 and October 31, 2006, respectively			20,109				20,095
Paid-in capital			18,540				17,181
Retained earnings			285,748				291,064
Total stockholders’ equity			324,397				328,340
Total liabilities and stockholders’ equity		$	529,598			$	485,067

See notes to condensed consolidated financial statements.

SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

		Three Months Ended
		January 31,
		2007				2006
			(In thousands)
Net sales		$	292,711			$	236,203
Cost and expenses:
Cost of sales			283,673				236,854
Selling, general and administrative			12,467				13,384
			296,140				250,238
OPERATING LOSS			(3,429	)			(14,035	)
Other income (expense):
Interest income			46				124
Interest expense			(1,220	)			(76	)
Other			4				39
			(1,170	)			87
LOSS BEFORE INCOME TAXES			(4,599	)			(13,948	)
Income tax benefit			(1,750	)			(5,342	)
NET LOSS		$	(2,849	)		$	(8,606	)
Loss per share:
Basic		$	(.14	)		$	(.43	)
Diluted		$	(.14	)		$	(.43	)
Dividends per share		$	.12			$	.12
Weighted average shares outstanding:
Basic			20,103				20,064
Diluted			20,103				20,064

See notes to condensed consolidated financial statements.

SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

		Three Months Ended
		January 31,
		2007				2006
		(In thousands)
Operating activities
Net loss		$	(2,849	)		$	(8,606	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			8,287				6,461
Non-cash stock compensation			754				726
Change in assets and liabilities:
Accounts receivable, net			(12,240	)			(2,712	)
Receivable from insurance companies			0				1,998
Inventories			(8,142	)			(5,098	)
Other assets			(8,905	)			(5,473	)
Accounts payable, accrued expenses and other liabilities			14,150				(7,959	)
Total adjustments			(6,096	)			(12,057	)
Net cash used in operating activities			(8,945	)			(20,663	)
Investing activities
Capital expenditures			(33,380	)			(22,819	)
Net proceeds from sale of property and equipment			354				598
Net cash used in investing activities			(33,026	)			(22,221	)
Financing activities
Principal payments on long-term debt			(138	)			(131	)
Net borrowings from revolving line of credit			35,000				10,000
Net proceeds from issuance of common stock (14,438 shares in 2007 and 37,765 shares in 2006)			488				621
Tax benefit on exercised stock options			131				27
Net cash provided by financing activities			35,481				10,517
Net change in cash and cash equivalents			(6,490	)			(32,367	)
Cash and cash equivalents at beginning of period			7,396				34,616
Cash and cash equivalents at end of period		$	906			$	2,249
Supplemental disclosure of non-cash financing activity:
Dividends payable		$	(2,467	)		$	(2,452	)

See notes to condensed consolidated financial statements.

SANDERSON FARMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
January 31, 2007

NOTE 1 — 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, 2007 are not necessarily indicative of the results that may be expected for the year ending October 31, 2007.

The consolidated balance sheet at October 31, 2006 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 the year ended October 31, 2006.

The condensed consolidated statement of operations, for the three months ended January 31, 2006, include a reclassification of certain expenses to cost of sales from net sales, in order to conform with the classification in the current periods. The reclassification to cost of sales from net sales were $14.1 million during the three months ended January 31, 2006.

NOTE 2—INVENTORIES

Inventories consisted of the following:

		January 31,				October 31,
		2007				2006
		(In thousands)
Live poultry-broilers and breeders		$	61,043			$	53,011
Feed, eggs and other			17,129				13,840
Processed poultry			15,510				18,102
Processed food			6,013				6,492
Packaging materials			4,937				5,045
		$	104,632			$	96,490

NOTE 3—STOCK COMPENSATION PLANS

Refer to Note 9 of our October 31, 2006 audited financial statements for further information on our employee benefit plans and stock compensation plans. Total stock based compensation expense applicable to the Company’s restricted stock grants for the three months ended January 31, 2007 and January 31, 2006 was $754,000 and $726,000, respectively.

During the three months ended January 31, 2007, participants in the Company’s Management Share Purchase Plan purchased a total of 4,700 shares of restricted stock at an average price of $30.29 and the Company issued 1,157 matching restricted shares.

During the quarter ended January 31, 2007, the Company entered into performance share agreements that grant certain officers and key employees the right to receive a target number of 106,000 shares of the Company’s common stock, subject to the Company’s achievement of certain performance measures. The aggregate target number of shares specified in performance share agreements outstanding as of January 31, 2007 totaled 179,950. No compensation cost was recognized for performance shares during the three months ended January 31, 2007 because achievement of the applicable performance measures is not considered probable.

NOTE 4 — EARNINGS PER SHARE

Basic net loss per share was calculated by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share was calculated by dividing net loss by the weighted-average number of common shares outstanding during the period plus the dilutive effects of stock options and restricted stock outstanding. Restricted stock and employee stock options representing 77,270 and 88,924 common shares for the three months ended January 31, 2007 and January 31, 2006 were excluded from the calculation of diluted net loss per share for the periods because the effect was antidilutive.

NOTE 5—NEW ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued Interpretation No. 48, Accounting for “Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” Interpretation 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with Statement No. 109 and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Additionally, Interpretation No. 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Interpretation 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. The Company is currently evaluating the impact the adoption of Interpretation 48 will have on the Company’s consolidated financial position, results of operations and cash flows.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS No. 159”), The Fair Value Option for Financial Assets and Liabilities. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 will be effective for the Company’s fiscal year beginning November 1, 2008. Early adoption is permitted. The Company has not determined the impact, if any, that adopting this standard may have on our financial position, cash flows, and results of operations.

NOTE 6 — OTHER MATTERS

On June 6, 2006, Annie Collins, a former employee of the processing division subsidiary, on behalf of herself and as representative of “a class of individuals who are similarly situated and who have suffered the same or similar damages” filed a complaint against the Company’s processing and production subsidiaries in the United States District Court for the Eastern District of Louisiana.

Plaintiffs allege that the Company’s subsidiaries violated the Fair Labor Standards Act by failing to pay plaintiffs and other hourly employees for the time spent donning and doffing protective and sanitary clothing and performing other alleged compensable activities, and that “Sanderson automatically deducted thirty minutes from each worker’s workday for a meal break regardless of the actual time spent on break.” Plaintiffs also allege that they were not paid overtime wages at the legal rate. Plaintiffs seek unpaid wages, liquidated damages and injunctive relief.

On July 24, 2006, plaintiffs filed their First Amended Motion for Protective Order, Sanctions and a Corrective Notice related to a letter the Company sent to all employees concerning the donning and doffing issue. The letter informed employees that, among other things, the Company was in negotiations with the Department of Labor about any adjustment to its pay practices and its calculations of any back pay obligations. The Company responded to the plaintiffs’ motion and filed a Motion to Stay Proceedings Pending Conciliation Efforts with the Department of Labor. On July 25, 2006, plaintiffs responded to the Company’s motion, which is still pending. On July 31, 2006, the Company filed its Answer to the plaintiffs Complaint.

On July 20, 2006, ten current and former employees of the processing division subsidiary filed an action nearly identical to the one described above. Approximately 3,524 individuals purportedly have given their consent to be a party plaintiff to this and the aforementioned action. Since the filing of these two complaints, six other substantially similar lawsuits were filed in United States District Courts for the Jackson and Hattiesburg divisions of Mississippi. Unlike the two previous suits referenced above, these Complaints are specific to individual processing locations of the subsidiary Corporation. The Company will vigorously defend all donning and doffing litigation.

The Company is also involved in various other claims and litigation incidental to its business. Although the outcome of the matters referred to in the preceding sentence cannot be determined with certainty, management, upon the advice of counsel, is of the opinion that the final outcome should not have a material effect on the Company’s consolidated results of operation 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. A determination of the amount of reserves required, if any, for these matters is made after considerable analysis of each individual case. Because the outcome of these cases cannot be determined with any certainty, no estimate of the possible loss or range of loss resulting from the cases can be made. At this time, the Company has not accrued any reserve for any of these matters. Future reserves may be required if losses are deemed 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 or changes to reserves or by accruals of losses to reflect any adverse determinations of these legal proceedings.

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, 2007, and the related condensed consolidated statements of operations and cash flows for the three months ended January 31, 2007 and 2006. 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 to financial data, 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, 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, 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended not presented herein, and in our report dated December 27, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of October 31, 2006, 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, 2007

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, 2006.

     This Quarterly Report, and other periodic reports filed by the Company under the Securities Exchange Act of 1934, and other written or oral statements made by it or on its behalf, may include forward-looking statements, which 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 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, either of which may affect the value of inventories, the collectability of accounts receivable or the financial integrity of customers.

(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.

(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.

(9) Changes in the availability and cost of labor and growers.

     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 quarterly 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.

     The Company’s poultry operations are integrated through its management 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, and marketing. Consistent with the poultry industry, the Company’s profitability is substantially impacted 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.

     The Company’s processed and prepared foods product line includes over 100 institutional and consumer packaged food items that it sells nationally and regionally, primarily to distributors, food service establishments and retailers. A majority of the prepared food items are made to the specifications of food service users.

     On January 12, 2006, the Company announced that sites in Waco and McLennan County, Texas had been selected for the construction of a new poultry complex, consisting of a processing plant, hatchery and wastewater treatment facility. The plant is expected to begin operations during the Company’s fourth fiscal quarter of 2007, and at full production will process approximately 1.2 million head of chickens per week.

EXECUTIVE OVERVIEW OF RESULTS

The Company’s financial results for the three months ended January 31, 2007 reflect improved market prices for the Company’s poultry products and improved efficiencies at the Company’s poultry complexes in South Georgia and Collins, Mississippi. The improvement in the first quarter of 2007 versus the same period of 2006 is also the result of the negative impact during the first quarter of 2006 on the Company’s Mississippi and Louisiana poultry operations due to the effects of Hurricane Katrina. The South Georgia complex reported a significant increase in the volume of poultry products sold during the first quarter of fiscal 2007 as compared to the first quarter of fiscal 2006 due to the start-up nature of operations during the first quarter of fiscal 2006. The Collins, Mississippi processing facility also increased the pounds of poultry products sold as a result of the conversion of the plant in the first quarter of fiscal 2006 to the big bird deboning market from the chill pack market. That facility was down for one week during the first quarter of fiscal 2006 to allow for the installation of certain equipment required for the conversion of the facility to big bird deboning market. However, the effect of the improvements in market prices for the Company’s poultry products and increased efficiencies were negatively impacted by an increase in the cost of corn during the first quarter of fiscal 2007 as compared to the first quarter of fiscal 2006. The market price for corn, which has been higher in part because of increased demand from Ethanol producers, is expected to remain high and volatile at least through the end of the Company’s 2007 fiscal year. The Company expects its feed grain costs will be significantly higher in fiscal 2007 than fiscal 2006.

RESULTS OF OPERATIONS

Net sales for the three months ended January 31, 2007 were $292.7 million as compared to $236.2 million for the same three months ended January 31, 2006, an increase of $56.5 million or 23.9%. The increase in net sales during the first quarter of fiscal 2007 reflects a 24.4% increase in the pounds of poultry products sold and a 22.4% increase in the pounds of prepared food products sold. The additional pounds of poultry products sold can be attributed to the new complex in South Georgia, which began operations during the fourth quarter of fiscal 2005 and was ramping up production during the first quarter of fiscal 2006, and increased pounds of products sold at the Collins, Mississippi processing plant, which was down for one week during the first quarter of fiscal 2006 to allow for the conversion to serve the big bird market from the chill pack market. The Company also sold fewer pounds during the first quarter of fiscal 2006 due to the destruction of inventories during Hurricane Katrina that would have been available for sale during the first quarter of fiscal 2006. In addition, the disruption of shipping caused by Hurricane Katrina and sluggish demand resulting from the appearance of H5N1 in certain countries in Asia and Europe during the first quarter of fiscal 2006 postponed the sale of certain export products until later in fiscal 2006. These export products have a lower average sales price than the products sold on the domestic markets. Market prices for boneless breast, tenders, wings and leg quarters were 12.9%, 16.1%, 23.7% and 21.4% higher during the first quarter of fiscal 2007 as compared to the first quarter of fiscal 2006, respectively, while a simple average of the Georgia dock prices for whole birds decreased 1.7%. The improvement in the overall market prices for poultry products resulted from a comparative oversupply of poultry products during the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2007 due to sluggish demand for poultry products in the domestic and export markets which resulted in part from the appearance of H5N1 in certain countries of Asia and Europe. Net sales of prepared food products increased $6.2 million, or 20.8% during the three months ended January 31, 2007 as compared to the three months ended January 31, 2006.

Cost of sales for the three months ended January 31, 2007, were $283.7 million, an increase of $46.8 million, or 19.8% as compared to the same three months ended January 31, 2006. Cost of sales of the Company’s poultry products increased $42.7 million, or 20.3%. The increase in the cost of sales of the Company’s poultry products resulted from an increase in the pounds of poultry products sold of 24.4% and an increase in the average cost of feed in flocks sold of 15.4%. These increases were partially offset by increased efficiencies at the Company’s facilities in South Georgia and Collins, Mississippi and the negative impact of Hurricane Katrina of $3.0 million on the Company’s Mississippi and Louisiana operations during the first quarter of fiscal 2006. In addition, the impact of Hurricane Katrina and the appearance of H5N1 avian influenza in certain countries of Asia and Europe during the first quarter of fiscal 2006 resulted in fewer pounds sold of leg quarters and chicken paws to some export markets. These products have a lower average cost of sales than the Company’s average sale price of poultry products. As previously mentioned, the Company’s cost of sales was negatively impacted by an increase in the cost of feed grains during the first three months of fiscal 2007 as compared to the same period of fiscal 2006. A simple average of the Company’s cost of corn during the first quarter of fiscal 2007 as compared to the first quarter during fiscal 2006 reflects an increase of 57.4%, while soybean meal prices remained flat. The Company’s cost of sales was also higher during the quarter due to an increase in the pounds of prepared food products sold of 22.4%. The Company’s

prepared food products have a higher average cost of sales per pound than the Company’s poultry products. Cost of sales of prepared food products increased $4.1 million or 15.4%.

Selling, general and administrative costs for the three months ended January 31, 2007 were $12.5 million as compared to $13.4 million during the three months ended January 31, 2006. The decrease in selling, general and administrative costs for the first quarter of $917,000 resulted from lower advertising expenditures, partially offset by $297,000 in start up costs related to the new complex in Waco, Texas, which will begin operations during the fourth quarter of fiscal 2007. The Company did not incur any start up costs during fiscal 2006. The Company expects start-up costs related to the new complex in Waco, Texas to be approximately $1.5 and $2.3 million, respectively, for the second and third quarters of fiscal 2007.

For the three months ended January 31, 2007, the Company reported an operating loss of $3.4 million as compared to an operating loss of $14.0 million for the three months ended January 31, 2006. The improvement of $10.6 million during the first three months of 2007 resulted from the improved market prices of poultry products and increased efficiencies at the Company’s poultry facilities in South Georgia and Collins, Mississippi, and the negative impact during 2006 of approximately $3.0 million from Hurricane Katrina on the Company’s Mississippi and Louisiana facilities. The estimated loss of $3.0 million during fiscal 2006 from Hurricane Katrina resulted from unrecognized lost profits and certain expenses that were the direct result of the Company’s efforts to minimize the effect of Hurricane Katrina. The Company did not experience a loss from Hurricane Katrina during its second and third quarters of fiscal 2006.

Interest expense during the three months ended January 31, 2007 was $1.2 million as compared to $76,000 during the three months ended January 31, 2006. The increase in interest expense resulted from higher outstanding debt and higher interest rates during the first quarter of fiscal 2007 as compared to the first quarter of fiscal 2006, partially offset by the capitalization of interest for the construction of the new complex in Waco, Texas. The Company capitalized $423,000 of interest costs for the new complex in Waco, Texas during the first quarter of fiscal 2007 and capitalized $226,000 of interest costs related to the construction of the new general offices in Laurel, Mississippi and the new feed mill in Collins, Mississippi during the first quarter of fiscal 2006. The Company expects interest expense during the remainder of fiscal 2007 to be higher than interest expense during the same periods of fiscal 2006.

The Company’s effective tax rate for the three months ended January 31, 2007 was 38.0% compared to 38.3% for the three months ended January 31, 2006. The 2006 effective tax rate differs from the statutory federal rate due to state income taxes and certain nondeductible expenses for federal income tax purposes. The 2007 effective tax rate differs from the statutory federal rate due to state income taxes, certain nondeductible expenses for federal income tax purposes and the benefit of certain federal income tax credits available as the result of the impact of Hurricane Katrina on the Company. The Company’s actual effective rate for the year ended October 31, 2007 may differ from the current estimates based on the results of operations for the remainder of fiscal 2007 and final determination of the income tax credits available to the Company.

The Company’s net loss was $2.8 million or $.14 per share for the first quarter of fiscal 2007 as compared to a net loss for the first quarter of fiscal 2006 of $8.6 million, or $.43 per share. During the first quarter of fiscal 2006 the Company incurred certain expenses and lost profits of $3.0 million before income taxes from Hurricane Katrina.

Liquidity and Capital Resources

The Company’s working capital at January 31, 2007 was $116.2 million and its current ratio was 2.5 to 1. This compares to working capital of $112.9 million and a current ratio of 2.9 to 1 as of October 31, 2006. During the three months ended January 31, 2007, the Company spent approximately $33.4 million on planned capital projects, of which $26.2 million pertains to the construction of the new complex in Waco, Texas and expansion of the Robertson County, Texas feed mill.

The Company’s capital budget for fiscal 2007 is approximately $102.6 million at January 31, 2007, and will be funded by cash on hand, internally generated working capital, cash flows from operations and available credit. The Company has $140.0 million available under its revolving line of credit at January 31, 2007. The fiscal 2007 capital budget includes approximately $3.3 million in operating leases, $73.5 million to complete construction of the new poultry complex in Waco, Texas and expansion of the Robertson County, Texas feed mill and $2.7 million to renovate the corporate technical lab in Laurel, Mississippi. Without operating leases, the new poultry complex in Waco, Texas, expansion of the feed mill in Robertson County, Texas and the new lab in Laurel, Mississippi, the Company’s capital budget for fiscal 2007 would be $23.1 million.

On January 12, 2006, Sanderson Farms, Inc. announced that sites in Waco and McLennan County, Texas had been selected for construction of a new poultry processing plant, wastewater treatment facility and hatchery. Sanderson Farms will also expand its feed mill in Robertson County, Texas to satisfy the live production needs associated with the new complex. The Company invested $15.2 million in this facility during fiscal 2006, and expects to invest approximately $73.5 million in the new complex during fiscal 2007.

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 Policies and Estimates

     The preparation of financial statements in accordance with accounting standards generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and assumptions, and the differences could be material.

     The Company’s Summary of Significant Accounting Policies, as described in Note 1 of the Notes to the Consolidated Financial Statements that are filed with the Company’s latest report on Form 10-K, should be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management believes that the critical accounting policies and estimates that are material to the Company’s Consolidated Financial Statements are those described below.

     Allowance for Doubtful Accounts

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

     Inventories

     Processed food and poultry inventories and inventories of feed, eggs, medication and packaging supplies are stated at the lower of cost (first-in, first-out method) or market. If market prices for poultry or feed grains move substantially lower, the Company would record adjustments to write down the carrying values of processed poultry and feed inventories to fair market value, which would increase the Company’s costs of sales.

     Live poultry inventories of broilers are stated at the lower of cost or market and breeders at cost less accumulated amortization. The cost associated with broiler inventories, consisting principally of chicks, feed, medicine and payments to the growers who raise the chicks for us, are accumulated during the growing period. The cost associated with breeder inventories, consisting principally of breeder chicks, feed, medicine and grower payments are accumulated during the growing period. Capitalized breeder costs are then amortized over nine months using the straight-line method. Mortality of broilers and breeders is charged to cost of sales as incurred. If market prices for chickens, feed or medicine or if grower payments increase (or decrease) during the period, the Company could have an increase (or decrease) in the market value of its inventory as well as an increase (or decrease) in costs of sales. Should the Company decide that the nine month amortization period used to amortize the breeder costs is no longer appropriate as a result of operational changes, a shorter (or longer) amortization period could increase (or decrease) the costs of sales recorded in future periods. High mortality from disease or extreme temperatures would result in abnormal charges to cost of sales to write-down live poultry inventories.

     Long-Lived Assets

     Depreciable long-lived assets are primarily comprised of buildings and machinery and equipment. Depreciation is provided by the straight-line method over the estimated useful lives, which are 15 to 39 years for buildings and 3 to 12 years for machinery and equipment. An increase or decrease in the estimated useful lives would result in changes to depreciation expense.

     The Company continually evaluates the carrying value of its long-lived assets for events or changes in circumstances that indicate that the carrying value may not be recoverable. As part of this evaluation, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposal. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized to reduce the carrying value of the long-lived asset to the estimated fair value of the asset. If the Company’s assumptions with respect to the future expected cash flows associated with the use of long-lived assets currently recorded change, then the Company’s determination that no impairment charges

are necessary may change and result in the Company recording an impairment charge in a future period. The Company did not identify any indicators of impairment during the current fiscal period.

     Accrued Self Insurance

     Insurance expense for workers’ compensation benefits and employee-related health care benefits are estimated using historical experience and actuarial estimates. Stop-loss coverage is maintained with third party insurers to limit the Company’s total exposure. Management regularly reviews the assumptions used to recognize periodic expenses. Any resulting adjustments to accrued claims are reflected in current operating results. If historical experience proves not to be a good indicator of future expenses, if management were to use different actuarial assumptions, or if there is a negative trend in the Company’s claims history, there could be a significant increase or decrease in cost of sales depending on whether these expenses increased or decreased, respectively.

     Income Taxes

     The Company determines its effective tax rate by estimating its permanent differences resulting from differing treatment of items for financial and income tax purposes. The Company is periodically audited by taxing authorities and considers any adjustments made as a result of the audits in considering the tax expense. Any audit adjustments affecting permanent differences could have an impact on the Company’s effective tax rate.

     Contingencies

     The Company is a party to a number of legal proceedings as discussed in Note 6 of our unaudited quarterly condensed consolidated financial statements filed with this report. We recognize the costs of legal defense in the periods incurred. A determination of the amount of reserves required, if any, for these matters is made after considerable analysis of each individual case. Because the outcome of these cases cannot be determined with any certainty, no estimate of the possible loss or range of loss resulting from the cases can be made. At this time, the Company has not accrued any reserve for any of these matters. Future reserves may be required if losses deemed 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 or changes to reserves or by accruals of losses to reflect any adverse determination of these legal proceedings.

     New Accounting Pronouncements

     In July 2006, the FASB issued Interpretation No. 48, Accounting for “Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” Interpretation 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with Statement No. 109 and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Additionally, Interpretation No. 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Interpretation 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. The Company is currently evaluating the impact the adoption of Interpretation 48 will have on the Company’s consolidated financial position, results of operations and cash flows.

     In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS No. 159”), The Fair Value Option for Financial Assets and Liabilities. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 will be effective for the Company’s fiscal year beginning November 1, 2008. Early adoption is permitted. The Company has not determined the impact, if any, that adopting this standard may have on our financial position, cash flows, and results of operations.

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 purchases its corn, soybean meal and other feed ingredients for prompt delivery to its feed mills at market prices at the time of such purchases. The Company sometimes will purchase feed ingredients for deferred delivery that typically ranges from one month to twelve months after the time of purchase. The grain purchases are made directly with our usual grain suppliers, which are companies in the regular business of supplying grain to end users, and do not involve options to purchase. Such purchases occur when senior management 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, management believes it can purchase feed ingredients at prices that will allow the Company to earn a reasonable return for its shareholders. Market factors considered by management in determining whether or not and to what extent 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 impact 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 impacted 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 by SFAS 133, “Accounting for Derivatives for Instruments and Hedging Activities.” The Company does not enter into any derivative transactions or purchase any grain-related contracts other than the physical grain contracts described above.

     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.

     The Company’s interest expense is sensitive to changes in the general level of U.S. interest rates. The Company maintains certain of its debt as fixed rate in nature to mitigate the impact of fluctuations in interest rates. The fair value of the Company’s fixed rate debt approximates the carrying amount at January 31, 2007. Management believes the potential effects of near-term changes in interest rates on the Company’s debt is not material.

     The Company is a party to no other market risk sensitive instruments requiring disclosure.

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 Securities 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, 2007. There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended January 31, 2007 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

On June 6, 2006, Annie Collins, a former employee of the processing division subsidiary, on behalf of herself and as representative of “a class of individuals who are similarly situated and who have suffered the same or similar damages” filed a complaint against the Company’s processing and production subsidiaries in the United States District Court for the Eastern District of Louisiana.

Plaintiffs allege that the Company’s subsidiaries violated the Fair Labor Standards Act by failing to pay plaintiffs and other hourly employees for the time spent donning and doffing protective and sanitary clothing and performing other alleged compensable activities, and that “Sanderson automatically deducted thirty minutes from each worker’s workday for a meal break regardless of the

14

actual time spent on break.” Plaintiffs also allege that they were not paid overtime wages at the legal rate. Plaintiffs seek unpaid wages, liquidated damages and injunctive relief.

On July 24, 2006, plaintiffs filed their First Amended Motion for Protective Order, Sanctions and a Corrective Notice related to a letter the Company sent to all employees concerning the donning and doffing issue. The letter informed employees that, among other things, the Company was in negotiations with the Department of Labor about any adjustment to its pay practices and its calculations of any back pay obligations. The Company responded to the plaintiffs’ motion and filed a Motion to Stay Proceedings Pending Conciliation Efforts with the Department of Labor. On July 25, 2006, plaintiffs responded to the Company’s motion, which is still pending. On July 31, 2006, the Company filed its Answer to the plaintiffs Complaint.

On July 20, 2006, ten current and former employees of the processing division subsidiary filed an action nearly identical to the one described above. Approximately 3,524 individuals purportedly have given their consent to be a party plaintiff to this and the aforementioned action. Since the filing of these two complaints, six other substantially similar lawsuits were filed in United States District Courts for the Jackson and Hattiesburg divisions of Mississippi. Unlike the two previous suits referenced above, these Complaints are specific to individual processing locations of the subsidiary Corporation. The Company will vigorously defend all donning and doffing litigation.

The Company is also involved in various other claims and litigation incidental to its business. Although the outcome of the matters referred to in the preceding sentence cannot be determined with certainty, management, upon the advice of counsel, is of the opinion that the final outcome should not have a material effect on the Company’s consolidated results of operation 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. A determination of the amount of reserves required, if any, for these matters is made after considerable analysis of each individual case. Because the outcome of these cases cannot be determined with any certainty, no estimate of the possible loss or range of loss resulting from the cases can be made. At this time, the Company has not accrued any reserve for any of these matters. Future reserves may be required if losses are deemed 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 or changes to reserves or by accruals of losses to reflect any adverse determinations of these legal proceedings.

Item 1A. Risk Factors

     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, 2006.

Item 6. Exhibits

     The following exhibits are filed with this report.

     Exhibit 3.1 Articles of Incorporation of the Registrant dated October 19, 1978. (Incorporated by reference to Exhibit 4.1 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)

     Exhibit 3.2 Articles of Amendment, dated March 23, 1987, to the Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 4.2 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)

     Exhibit 3.3 Articles of Amendment, dated April 21, 1989, to the Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 4.3 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)

     Exhibit 3.4 Certificate of Designations of Series A Junior Participating Preferred Stock of the Registrant dated April 21, 1989. (Incorporated by reference to Exhibit 4.4 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)

     Exhibit 3.5 Article of Amendment, dated February 20, 1992, to the Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 4.5 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)

     Exhibit 3.6 Article of Amendment, dated February 27, 1997, to the Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 4.6 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)

     Exhibit 3.7 Bylaws of the Registrant, amended and restated as of December 2, 2004. (Incorporated by reference to Exhibit 3 filed with the Registrant’s Current Report on Form 8-K on December 8, 2004.)

     Exhibit 10.1 Form of Performance Share Agreement between Registrant and its officers and employees who are granted performance shares. (Incorporated by reference to Exhibit 10.22 filed with the Registrant’s Annual Report on Form 10-K for the year ended October 31, 2006.)

     Exhibit 10.2 Sanderson Farms, Inc. Bonus Award Program effective November 1, 2006. (Incorporated by reference to Exhibit 10 filed with the Registrant’s current report on Form 8-K on January 29, 2007.)

     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.

*		Filed herewith.
+		Management contract or compensatory plan or arrangement.
**		Furnished herewith.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

INDEX TO EXHIBITS

Exhibit
Number		Description of Exhibit
3.1		Articles of Incorporation of the Registrant dated October 19, 1978. (Incorporated by reference to Exhibit 4.1 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)
3.2		Articles of Amendment, dated March 23, 1987, to the Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 4.2 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)
3.3		Articles of Amendment, dated April 21, 1989, to the Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 4.3 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)
3.4		Certificate of Designations of Series A Junior Participating Preferred Stock of the Registrant dated April 21, 1989. (Incorporated by reference to Exhibit 4.4 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)
3.5		Article of Amendment, dated February 20, 1992, to the Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 4.5 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)
3.6		Article of Amendment, dated February 27, 1997, to the Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 4.6 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)
3.7		Bylaws of the Registrant amended and restated as of December 2, 2004. (Incorporated by reference to Exhibit 3 filed with the Registrant’s Current Report on Form 8-K on December 8, 2004.)
10.1		Form of Performance Share Agreement between Registrant and its officers and employees who are granted performance shares. (Incorporated by reference to Exhibit 10.22 filed with the Registrant’s Annual Report on Form 10-K for the year ended October 31, 2006.)
10.2		Sanderson Farms, Inc. Bonus Award Program effective November 1, 2006. (Incorporated by reference to Exhibit 10 filed with the Registrant’s current report on Form 8-K on January 29, 2007.)
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.

*		Filed herewith.
**		Furnished herewith.
+		Management contract or compensatory plan or arrangement.