UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

FORM 10-K

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

For The Fiscal Year Ended   June 1, 2019

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

Commission file number:  000-04892

CAL-MAINE FOODS, INC.

(Exact name of registrant as specified in its charter)

Delaware	64-0500378
(State or other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

3320 W Woodrow Wilson Ave, Jackson, Mississippi  39209-3409

(Address of principal executive offices) (Zip Code)

(601) 948-6813

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Act:

Title of each class:	Trading Symbol(s)	Name of each exchange on which registered:
Common Stock,  $0.01 par value per share	CALM	The NASDAQ Global Select Market

Securities registered pursuant to Section 12 (g) of the Act:  NONE

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

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

The aggregate market value, as reported by The NASDAQ Global Select Market, of the registrant’s Common Stock, $0.01 par value, held by non-affiliates at December 1, 2018, which was the date of the last business day of the registrant’s most recently completed second fiscal quarter, was $1,467,922,217.

As of July 19, 2019,  43,894,478 shares of the registrant’s Common Stock, $0.01 par value, and 4,800,000 shares of the registrant’s Class A Common Stock, $0.01 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Part III of this Form 10-K is incorporated herein by reference from the registrant’s Definitive Proxy Statement for its 2019 annual meeting of stockholders which will be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.

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TABLE OF CONTENTS

Item		Page Number
	Part I
FORWARD-LOOKING STATEMENTS		3
1.	Business	3
1A.	Risk Factors	9
1B.	Unresolved Staff Comments	15
2.	Properties	15
3.	Legal Proceedings	16
4.	Mine Safety Disclosures	18
	Part II
5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	18
6.	Selected Financial Data	21
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
7A.	Quantitative and Qualitative Disclosures About Market Risk	35
8.	Financial Statements and Supplementary Data	37
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	67
9A.	Controls and Procedures	67
9B.	Other Information	70
	Part III
10.	Directors, Executive Officers and Corporate Governance	70
11.	Executive Compensation	70
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	70
13.	Certain Relationships and Related Transactions, and Director Independence	71
14.	Principal Accounting Fees and Services	71
	Part IV
15.	Exhibits, Financial Statement Schedules	71
	Signatures	73

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PART I.

FORWARD-LOOKING STATEMENTS

This report contains numerous forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) relating to our shell egg business, including estimated production data, expected operating schedules, expected capital costs and other operating data, including anticipated results of operations and financial condition.  Such forward-looking statements are identified by the use of words such as “believes,” “intends,” “expects,” “hopes,” “may,” “should,” “plans,” “projected,” “contemplates,” “anticipates” or similar words.  Actual production, operating schedules, results of operations and other projections and estimates could differ materially from those projected in the forward-looking statements.  The forward-looking statements are based on management’s current intent, belief, expectations, estimates and projections regarding our company and our industry.  These statements are not guarantees of future performance and involve risks, uncertainties, assumptions and other factors that are difficult to predict and might be beyond our control.  The factors that could cause actual results to differ materially from those projected in the forward-looking statements include, among others, (i) the risk factors set forth in Item 1A and elsewhere in this report as well as those included in other reports we file from time to time with the Securities and Exchange Commission (the “SEC”) (including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K), (ii) the risks and hazards inherent in the shell egg business (including disease, such as avian influenza, pests, weather conditions and potential for recall), (iii) changes in the demand for and market prices of shell eggs and feed costs, (iv) our ability to predict and meet demand for cage-free and other specialty eggs, (v) risks, changes or obligations that could result from our future acquisition of new flocks or businesses, and (vi) adverse results in pending litigation matters.  Readers are cautioned not to place undue reliance on forward-looking statements because, while we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance these forward-looking statements will prove to be accurate.  Further, the forward‑looking statements included herein are only made as of the respective dates thereof, or if no date is stated, as of the date hereof.  Except as otherwise required by law, we disclaim any intent or obligation to publicly update these forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 1. BUSINESS

Our Business

Cal-Maine Foods, Inc. (“we,” “us,” “our,” or the “Company”) is the largest producer and marketer of shell eggs in the United States. In fiscal 2019, we sold approximately 1,038.9 million dozen shell eggs, which we believe represented approximately 19% of domestic shell egg consumption. Our total flock of approximately 36.2 million layers and 9.4 million pullets and breeders is the largest in the U.S.  Layers are mature female chickens, pullets are female chickens usually under 18 weeks of age, and breeders are male and female chickens used to produce fertile eggs to be hatched for egg production flocks.

The Company has one operating segment, which is the production, grading, packaging, marketing and distribution of shell eggs.  The majority of our customers rely on us to provide most of their shell egg needs, including specialty and non-specialty eggs. Specialty eggs represent a broad range of products.  We classify nutritionally enhanced, cage free, organic and brown eggs as specialty products for accounting and reporting purposes. We classify all other shell eggs as non-specialty products.  While we report separate sales information for these egg types, there are many cost factors which are not specifically available for non-specialty or specialty eggs due to the nature of egg production. We manage our operations and allocate resources to these types of eggs on a consolidated basis based on the demands of our customers.

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We sell most of our shell eggs in the southwestern, southeastern, mid-western and mid-Atlantic regions of the U.S. through our extensive distribution network to a diverse group of customers, including national and regional grocery store chains, club stores, foodservice distributors and egg product consumers. Some of our sales are completed through co-pack agreements – a common practice in the industry whereby production and processing of certain products is outsourced to another producer.  The strength of our position is evidenced by having the largest market share in the grocery segment for shell eggs.   We sell shell eggs to a majority of large U.S. food retailers.

We are one of the largest producers and marketers in the U.S. of value-added specialty shell eggs, which have been a significant and growing segment of the market in recent years.  A significant number of our food service customers, large restaurant chains, and major retailers, including our largest customers, have committed to exclusive offerings of cage-free eggs by specified future dates. We are working with our customers to ensure a  smooth transition in meeting their goals. Our focus for future expansion at our farms will be environments that are cage-free or with equipment that can easily be converted to cage-free, based on a timeline to meet our customer’s needs.

In fiscal 2019, specialty shell eggs and co-pack specialty shell eggs represented 36.2% and 2.0% of our shell egg sales dollars, respectively, and accounted for approximately 23.8% and 1.3%, respectively, of our total shell egg volumes. In fiscal 2018, specialty shell eggs and co-pack specialty shell eggs represented 32.0% and 1.8% of our shell egg sales dollars, respectively, and accounted for approximately 23.5% and 1.3%, respectively, of our total shell egg volumes.  Prices for specialty eggs are less volatile than non-specialty shell egg prices and are generally higher due to consumer willingness to pay for the perceived increased benefits from those products. We market our specialty shell eggs under the following brands: Egg-Land’s Best®,  Land O’ Lakes®, Farmhouse®, and 4-Grain®.   We are a member of the Egg-Land’s Best, Inc. (“EB”) cooperative and produce, market and distribute Egg-Land’s Best® and Land O’ Lakes®  branded eggs, along with our associated joint ventures, under exclusive license agreements for a number of states in the southeast, south central, and southwest U.S. as well as the New York City area.  We market cage-free eggs under our trademarked Farmhouse® brand and distribute them across the southeast and southwest regions of the U.S.  We market organic, cage-free, vegetarian, and omega-3 eggs under our 4-Grain® brand. We also produce, market, and distribute private label specialty shell eggs to several customers.

We are a leader in industry consolidation. Since 1989, we have completed 21 acquisitions ranging in size from 160,000 layers to 7.5 million layers.  Despite a market characterized by increasing consolidation, the shell egg production industry remains highly fragmented. According to Egg Industry magazine, at December 31, 2018, 60 producers, owning at least one million layers, owned approximately 98% of total industry layers. The ten largest producers owned approximately 53% of total industry layers. We believe industry consolidation will continue and we plan to capitalize on opportunities as they arise.

Industry Background 

Based on historical consumption trends, we believe general demand for eggs increases in line with overall population growth, averaging about 2% per year. In 2013 and 2014, consumption of eggs grew approximately 2% per year.  In 2015, egg consumption decreased approximately 4% over the prior year primarily due to a shortage of eggs resulting from an outbreak of avian influenza ("AI") in the spring of that year.  In 2016, consumption rebounded increasing 7% over 2015 and 3% over the pre-shortage level of 2014. According to U.S. Department of Agriculture (“USDA”), annual per capita U.S. consumption since 2000 varied between 249 and 284 eggs. In calendar year 2018, per capita U.S. consumption was estimated to be 284 eggs, or approximately five eggs per person per week. Per capita consumption is determined by dividing the total supply of eggs by the entire population in the U.S. (i.e. all eggs supplied domestically by the egg industry are consumed).  

Approximately 69% of eggs produced in the U.S. are sold as shell eggs. Shell egg sales are mostly to food service and retail consumers (e.g. through grocery and convenience stores) with a relatively small amount exported. The remaining 31% of eggs produced in the U.S. are sold as egg products (shell eggs broken and sold in liquid, frozen, or dried form) to institutions (e.g. companies producing baked goods). In both fiscal 2019 and 2018, approximately 3% of our net sales was egg products.

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Prices for Shell Eggs

Shell egg prices are a critical component of profitability for the Company and the industry as a whole. While there are many pricing mechanisms, we believe the majority of shell eggs sold in the U.S. in the retail and foodservice channels are sold at independently quoted wholesale market prices for shell eggs. We sell the majority of our non-specialty shell eggs at independently quoted wholesale market prices for shell eggs or formulas related to our costs of production which include the cost of corn and soybean meal.  For fiscal 2019, wholesale large shell egg prices in the southeast region, as quoted by Urner Barry, averaged $1.23 compared with $1.49 for fiscal 2018 and $0.85 for fiscal 2017, evidencing their volatility. For additional information regarding shell egg prices, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this report.

Feed Costs for Shell Egg Production

Feed is a primary cost component in the production of shell eggs and represents over half of industry farm level production costs. Most shell egg producers, including us, are vertically integrated, manufacturing the majority of the feed required for their operations. Although feed ingredients, primarily corn and soybean meal, are available from a number of sources, prices for ingredients can fluctuate and are affected by weather, speculators, and various supply and demand factors. Our feed cost per dozen eggs produced for fiscal 2019 was 5.3% higher than fiscal 2018 primarily due to unfavorable crop conditions in the south-central U.S. which resulted in higher ingredient prices at some of our larger feed mill operations. Looking forward to 2020, grain prices are trending higher as historic rainfall and flooding through the early growing season are adversely affecting this year’s U.S. corn and soybean crops.  However, ongoing uncertainties and geopolitical issues surrounding trade agreements and international tariffs have led to reduced exports and downward pressure on recent grain prices.  As such, we expect our feed costs to be more volatile and potentially higher in fiscal 2020.

Growth Strategy and Acquisitions

For many years, we have pursued a growth strategy focused on the acquisition of existing shell egg production and processing facilities, as well as the construction of new and more efficient facilities.  Since the beginning of fiscal 1989, we have completed 21 acquisitions. In addition, we have built numerous “in-line” shell egg production and processing facilities as well as pullet growing facilities which added to our capacity.  This growth has allowed us to more effectively retire older and less efficient facilities without losing production capacity.  The “in-line” facilities provide gathering, grading and packaging of shell eggs by less labor-intensive, more efficient, mechanical means.  We continue to upgrade and modify our facilities, and invest in new facilities, to meet changing demand as many food service customers, restaurant chains, and retailers have committed to exclusive offerings of cage-free eggs over the next several years.

The construction of new, more efficient production and processing facilities is also an integral part of our growth strategy.  Such construction requires compliance with applicable environmental laws and regulations, including the receipt of permits that could cause schedule delays, although we have not experienced any significant delays in the past.

Our total flock, including pullets, layers and breeders increased from approximately 40.8 million at the end of fiscal 2014 to approximately 45.6 million as of June 1, 2019.  The dozens of shell eggs sold increased from approximately 1,013.7 million in fiscal 2014 to approximately 1,038.9 million for fiscal 2019.  

We continue to pursue opportunities to acquire companies engaged in the production and sale of shell eggs.  We will continue to evaluate and selectively pursue acquisitions that will expand our shell egg production capabilities in existing markets and broaden our geographic reach. We have extensive experience identifying, valuing, executing, and integrating acquisitions and we intend to leverage that experience in the evaluation and execution of future acquisitions. We will seek to acquire regional shell egg businesses with significant market share and long-standing customer relationships. We believe enhancing our national presence will help us further strengthen our relationships with existing customers, many of whom have operations across the U.S.

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Federal antitrust laws require regulatory approval of acquisitions that exceed certain threshold levels of significance, and we are subject to federal and state laws prohibiting anti-competitive conduct.   We believe our sales of shell eggs during the last fiscal year represented approximately 19% of domestic shell egg sales, making us the largest producer and distributor of shell eggs in the U.S. However, because the shell egg production and distribution industry is so fragmented, we believe there are many acquisition opportunities available to us that would not be restricted pursuant to antitrust laws.

Through exclusive license agreements with EB in several key territories and our trademarked Farmhouse® and 4Grain® brands, we are a leading producer and marketer of value-added specialty shell eggs. We also produce, market, and distribute private label specialty shell eggs to several customers. Since selling prices of specialty shell eggs are generally less volatile than non-specialty shell egg prices, we believe growing our specialty eggs business will enhance the stability of our margins.  We expect the price of specialty eggs to remain at a premium to regular shell eggs, and intend to grow our specialty shell egg business.

Shell Eggs

Production.  Our operations are fully integrated. We hatch chicks, grow and maintain flocks of pullets, layers, and breeders, manufacture feed, and produce, process, package, and distribute shell eggs.  We produce approximately 84% of our total shell eggs sold, with 91% of such production coming from company-owned facilities, and the other 9% coming from contract producers.  Under a typical arrangement with a contract producer, we own the flock, furnish all feed and critical supplies, own the shell eggs produced and assume market risks. The contract producers own and operate their facilities and are paid a fee based on production with incentives for performance. We purchase approximately 16% of the total shell eggs we sell from outside producers.

The commercial production of shell eggs requires a source of baby chicks for laying flock replacement. We produce the majority of our chicks in our own hatcheries and obtain the balance from commercial sources. We own breeder and hatchery facilities capable of producing 21.2 million pullet chicks per year in a computer-controlled environment. These pullets are distributed to 43 laying operations around the southwestern, southeastern, mid-western and mid-Atlantic regions of the U.S.

Our facilities produce an average of 2.4 million dozen shell eggs per day. The shell eggs are processed, graded and packaged predominantly without handling by human hands. We have spent a cumulative total of $312.7 million over the past five years to expand and upgrade our facilities with the most advanced equipment and technology available in our industry. We believe our constant attention to production efficiencies and focus on automation throughout the supply chain enables us to be a low cost supplier in all the markets in which we compete.

Feed cost represents the largest element of our farm egg production cost, ranging from 57% to 62% of total farm production cost in the last five fiscal years. Although feed ingredients are available from a number of sources, we have little, if any, control over the prices of the ingredients we purchase, which are affected by weather, speculators, and various supply and demand factors.  For example, the severe drought in the summer of 2012 and resulting damage to the national corn and soybean crop resulted in high and volatile feed costs.  Increases in feed costs unaccompanied by increases in the selling price of eggs can have a material adverse effect on our operations.  High feed costs can encourage shell egg producers to reduce production, resulting in higher egg prices.  Alternatively, low feed costs can encourage industry overproduction, possibly resulting in lower egg prices. 

After the eggs are produced, they are graded and packaged.  Substantially all of our farms have modern “in-line” facilities to mechanically gather, grade and package the eggs produced.  The increased use of in-line facilities has generated significant cost savings compared to the cost of eggs produced from non-in-line facilities.  In addition to greater efficiency, the in-line facilities produce a higher percentage of USDA Grade A eggs, which sell at higher prices.  Eggs produced on farms owned by contractors are brought to our processing plants to be graded and packaged. Since shell eggs are perishable, we maintain very low egg inventories, usually consisting of approximately four days of production.

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Egg production activities are subject to risks inherent in the agriculture industry, such as weather conditions and disease.  These risks are outside our control and could have a material adverse effect on our operations.  The marketability of shell eggs is subject to risks such as possible changes in food consumption preferences and practices reflecting perceived health concerns.

We operate in a cyclical industry with total demand that is generally steady and a product that is generally price-inelastic.  Thus, small increases in production or decreases in demand can have a large adverse effect on prices and vice-versa.  

Marketing.  Of the 1,038.9 million dozen shell eggs sold by us in fiscal 2019, our flocks produced 876.7 million.

We sell our shell eggs to a diverse group of customers, including national and local grocery store chains, club stores, foodservice distributors, and egg product consumers. We utilize electronic ordering and invoicing systems that enable us to manage inventory for certain customers. Our top ten customers accounted for an aggregate of 69.8%, 69.4%, and 69.5% of net sales dollars for fiscal 2019, 2018, and 2017, respectively. Two customers, Wal-Mart Stores and Sam’s Club, on a combined basis, accounted for 33.7%, 33.2%, and 28.9% of net sales dollars during fiscal 2019, 2018, and 2017, respectively.

The majority of eggs sold are sold based on the daily or short-term needs of our customers.  Most sales to established accounts are on open account with payment terms ranging from seven to 30 days.  Although we have established long-term relationships with many of our customers, many of them are free to acquire shell eggs from other sources.

The shell eggs we sell are either delivered to our customers’ warehouse or retail stores, either by our own fleet or contracted refrigerated delivery trucks, or are picked up by our customers at our processing facilities.

We sell our shell eggs at prices generally related to independently quoted wholesale market prices or at formulas related to our costs of production. Wholesale prices are subject to wide fluctuations.  The prices of shell eggs reflect fluctuations in the quoted market and changes in corn and soybean meal prices, and the results of our shell egg operations are materially affected by changes in market quotations and feed costs.  Egg prices reflect a number of economic conditions, such as the supply of eggs and the demand level, which, in turn, are influenced by a number of factors we cannot control.  No representation can be made as to the future level of prices.

According to USDA reports, for the past five years, U.S. annual per capita egg consumption grew from 256 in 2015 to 284 in 2018. Looking ahead, we believe fast food restaurant consumption, high protein diet trends, industry advertising campaigns, and improved nutritional reputation of eggs related to better scientific understanding of the role of cholesterol in diets may result in increased per capita egg consumption levels; however, no assurance can be given that per capita consumption will not decline in the future.

We sell the majority of our shell eggs across the southwestern, southeastern, mid-western and mid-Atlantic regions of the U.S. We are a major factor in egg marketing in a majority of these states.  Many states in our market area are egg deficit regions where production of fresh shell eggs is less than total consumption.  Competition from other producers in specific market areas is generally based on price, service, and quality of product.  Strong competition exists in each of our markets.

Seasonality.  Retail sales of shell eggs are greatest during the fall and winter months and lowest during the summer months.  Prices for shell eggs fluctuate in response to seasonal demand factors and a natural increase in egg production during the spring and early summer. We generally experience lower sales and net income in our fourth and first fiscal quarters ending in May/June and August/September, respectively. During the past ten fiscal years, three of our first quarters resulted in net operating losses, and during this same period, three of our fourth quarters resulted in net operating losses.

Specialty Eggs. We produce specialty eggs such as Egg-Land’s Best®, Land O’ Lakes®, 4Grain®, and Farmhouse®

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branded eggs.  Specialty eggs are intended to meet the demands of consumers who are sensitive to environmental, health and/or animal welfare issues.  Specialty shell eggs are becoming a more significant segment of the shell egg market.  During recent years an increasing number of large restaurant chains, food service companies and grocery chains, including our largest customers, announced goals to transition to a cage-free egg supply chain by specified future dates.    For fiscal 2019, specialty eggs accounted for 36.2% of our shell egg dollar sales and 23.8% of our shell egg dozens sold, as compared to 32.0% of shell egg dollar sales and 23.5% of shell egg dozens sold in fiscal 2018.  Additionally, specialty eggs sold through our co-pack arrangements accounted for an additional 2.0% of shell egg dollar sales and 1.3% of shell egg dozens sold in fiscal 2019, compared with 1.8% of shell egg dollar sales and 1.3% of shell egg dozens sold in fiscal 2018.  We produce and process Egg-Land’s Best® and Land O’ Lakes® branded eggs under license from EB at our facilities under EB guidelines.  The product is marketed to our established base of customers at premium prices compared to non-specialty shell eggs. Egg-Land’s Best® branded eggs accounted for approximately 19.2% of our shell egg dollar sales in fiscal 2019, compared to 17.7% in fiscal 2018. Based on dozens sold, Egg-Land’s Best® branded eggs accounted for 12.8% of dozens sold for fiscal 2019, compared to 13.2% in fiscal 2018.  Land O’ Lakes® branded eggs are produced by hens that are fed a whole grain diet, free of animal fat and animal by-products.  Farmhouse® brand eggs are produced at our facilities by cage-free hens that are provided with a diet of all grain, vegetarian feed.  We market organic, wholesome, cage-free, vegetarian, and omega-3 eggs under our 4-Grain® brand, which consists of both caged and cage-free eggs.  Farmhouse®, Land O’ Lakes®, 4Grain® and other non-Egg-Land’s Best® specialty eggs accounted for 17.0% of our shell egg dollar sales in fiscal 2019, compared to 14.3% in fiscal 2018, and 11.1% of dozens sold for fiscal 2019, compared to 10.4% for fiscal 2018.

Egg Products.  Egg products are shell eggs broken and sold in liquid, frozen, or dried form.  In fiscal 2019 and 2018, egg products represented approximately 3% of our net sales.  We sell egg products primarily into the institutional and food service sectors in the U.S.  Our egg products are sold through our wholly owned subsidiary American Egg Products, LLC located in Blackshear, Georgia and our majority owned subsidiary Texas Egg Products, LLC located in Waelder, Texas.  Prices for egg products are generally related to independently quoted market prices or formulas.

Competition.  The production, processing, and distribution of shell eggs is an intensely competitive business, which traditionally has attracted large numbers of producers.  Shell egg competition is generally based on price, service, and product quality. 

The U.S. shell egg industry remains highly fragmented but is characterized by a growing concentration of producers. In 2018, 60  producers with one million or more layers owned 98% of the 337.9 million total U.S. layers, compared to 2000, when 63 producers with one million or more layers owned 79% of the 273 million total layers, and 1990, when 56 producers with one million or more layers owned 64% of the 232 million total layers. We believe a continuation of the concentration trend will result in reduced cyclicality of shell egg prices, but no assurance can be given in that regard. A continuation of this trend could also create greater competition among fewer producers.

Patents and Trade Names.  We own the trademarks Farmhouse®, Sunups®, Sunny Meadow® and 4Grain®. We do not own any patents or proprietary technologies. We produce and market Egg-Land's Best® and Land O’ Lakes® branded eggs under license agreements with EB.  We believe these trademarks and license agreements are important to our business.  We do not know of any infringing uses that would materially affect the use of these trademarks, and we actively defend and enforce them.

Government Regulation.  Our facilities and operations are subject to regulation by various federal, state, and local agencies, including, but not limited to, the United States Food and Drug Administration (“FDA”), USDA, Environmental Protection Agency (“EPA”), Occupational Safety and Health Administration and corresponding state agencies or laws. The applicable regulations relate to grading, quality control, labeling, sanitary control and reuse or disposal of waste. Our shell egg facilities are subject to periodic USDA, FDA and EPA inspections. Our feed production facilities are subject to FDA regulation and inspections. We maintain our own inspection program to ensure compliance with our own standards and customer specifications. There can be no assurance that we will not be required to incur significant costs for compliance with such statutes and regulations. In the future, additional rules could be proposed that, if adopted, could increase our costs.

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Environmental Regulation.  Our operations and facilities are subject to various federal, state, and local environmental, health and safety laws and regulations governing, among other things, the generation, storage, handling, use, transportation, disposal, and remediation of hazardous materials. Under these laws and regulations, we are required to obtain permits from governmental authorities, including, but not limited to, wastewater discharge permits. We have made, and will continue to make, capital and other expenditures relating to compliance with existing environmental, health and safety laws and regulations and permits. We are not currently aware of any major capital expenditures necessary to comply with such laws and regulations; however, because environmental, health and safety laws and regulations are becoming increasingly more stringent, including those relating to animal wastes and wastewater discharges, there can be no assurance that we will not be required to incur significant costs for compliance with such laws and regulations in the future.

Employees.  As of June 1, 2019, we had 3,490 employees, of whom 2,945 worked in egg production, processing and marketing, 165 worked in feed mill operations and 380 were administrative employees, including our executive officers.  Approximately 5.1% of our personnel are part-time.  None of our employees are covered by a collective bargaining agreement.  We consider our relations with employees to be good.

Our Corporate Information

We were founded in 1957 in Jackson, Mississippi.  We were incorporated in Delaware in 1969. Our principal executive office is located at 3320 W. Woodrow Wilson Avenue, Jackson, Mississippi 39209. The telephone number of our principal executive office is (601) 948-6813. We maintain a website at www.calmainefoods.com where general information about our business is available. The information contained in our website is not a part of this document. Our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, Forms 3, 4 and 5 ownership reports, and all amendments to those reports are available, free of charge, through our website as soon as reasonably practicable after they are filed with the SEC. Information concerning corporate governance matters is also available on our website.

Our Common Stock is listed on The NASDAQ Global Select Market (“NASDAQ”) under the symbol “CALM.” On May 31, 2019, the last sale price of our Common Stock on NASDAQ was $37.02 per share.  Our fiscal year 2019 ended June 1, 2019, and the first three fiscal quarters of fiscal 2019 ended September 1, 2018, December 1, 2018, and March 2, 2019.  All references herein to a fiscal year means our fiscal year and all references to a year mean a calendar year.  

ITEM 1A. RISK FACTORS

Our business and results of operations are subject to numerous risks and uncertainties, many of which are beyond our control.  The following is a description of the known factors that may materially affect our business, financial condition or results of operations.  They should be considered carefully, in addition to the information set forth elsewhere in this Annual Report on Form 10-K, including under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in making any investment decisions with respect to our securities.  Additional risks or uncertainties that are not currently known to us, that we currently deem to be immaterial or that could apply to any company could also materially adversely affect our business, financial condition or results of operations.

Market prices of wholesale shell eggs are volatile and decreases in these prices can adversely impact our results of operations.

Our operating results are significantly affected by wholesale shell egg market prices, which fluctuate widely and are outside our control.  As a result, our prior performance should not be presumed to be an accurate indication of future performance. Small increases in production, or small decreases in demand, can have a large adverse effect on shell egg prices. Low shell egg prices adversely effect our revenues and profits.

Market prices for wholesale shell eggs have been volatile. Shell egg prices trended upward from calendar 2002 until late 2003 and early 2004 when they rose to then historical highs.  In the early fall of calendar 2004, the demand trend

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related to the increased popularity of high protein diets faded dramatically and prices fell.  During the time of increased demand, the egg industry geared up to produce more eggs, resulting in an oversupply of eggs.  After calendar 2006, supplies were more closely balanced with demand and egg prices again reached record levels in 2007 and 2008.  Egg prices had subsequently retreated from those record price levels due to increases in industry supply before reaching new highs in 2014.  In 2015, egg prices rose again in large part due to a decrease in supply caused by the avian influenza outbreak in the upper Midwestern U.S. from April to June 2015. While the AI outbreak significantly impacted the supply and prices of eggs, there were no positive tests for AI at any of our locations.  The average Urner-Barry Thursday prices for the large market (i.e. generic shell eggs) in the southeastern region for the months of June through November 2015 was $2.32 per dozen, with a peak of $2.97 during August.  Subsequent to November 2015, shell egg prices declined. The Urner Barry price index hit a decade-low level in both our fiscal 2016 fourth quarter and fiscal 2017 second quarter. In fiscal 2018, non-specialty shell egg prices rebounded significantly due to strong demand before falling again in fiscal 2019 based on oversupply issues. These fluctuations illustrate the volatility of our industry. 

Shell egg prices are impacted by seasonal fluctuations. Retail sales of shell eggs are greatest during the fall and winter months and lowest in the summer months. Prices for shell eggs fluctuate in response to seasonal factors and a natural increase in shell egg production during the spring and early summer. Shell egg prices tend to increase with the start of the school year and are highest prior to holiday periods, particularly Thanksgiving, Christmas and Easter. Consequently, we generally experience lower sales and net income in our first and fourth fiscal quarters ending in August/September and May/June, respectively. As a result of these seasonal and quarterly fluctuations, comparisons of our sales and operating results between different quarters within a single fiscal year are not necessarily meaningful comparisons.

A decline in consumer demand for shell eggs can negatively impact our business.

We believe fast food restaurant consumption, high protein diet trends, industry advertising campaigns, and improved nutritional reputation of eggs related to better scientific understanding of the role of cholesterol in diets have all contributed to shell egg demand. However, there can be no assurance that the demand for shell eggs will not decline in the future. Adverse publicity relating to health concerns and changes in the perception of the nutritional value of shell eggs, as well as movement away from high protein diets, could adversely affect demand for shell eggs, which would have a material adverse effect on our future results of operations and financial condition.

Feed costs are volatile and increases in these costs can adversely impact our results of operations.

Feed cost represents the largest element of our shell egg (farm) production cost, ranging from 57% to 62% of total farm production cost in the last five fiscal years. Although feed ingredients are available from a number of sources, we have little, if any, control over the prices of the ingredients we purchase, which are affected by weather, speculators, various supply and demand factors, transportation and storage costs, and agricultural and energy policies in the U.S. and internationally.  For example, the severe drought in the summer of 2012 and resulting damage to the national corn and soybean crops resulted in high and volatile feed costs.  Increases in feed costs unaccompanied by increases in the selling price of eggs can have a material adverse effect on the results of our operations.  Alternatively, low feed costs can encourage industry overproduction, possibly resulting in lower egg prices. 

Due to the cyclical nature of our business, our financial results fluctuate from year to year and between different quarters within a single fiscal year.

The shell egg industry has traditionally been subject to periods of high profitability followed by periods of significant loss. In the past, during periods of high profitability, shell egg producers tended to increase the number of layers in production with a resulting increase in the supply of shell eggs, which generally caused a drop in shell egg prices until supply and demand returned to balance. As a result, our financial results from year to year vary significantly.  Additionally, as a result of seasonal fluctuations, our financial results fluctuate significantly between different quarters within a single fiscal year.

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We purchase a portion of the shell eggs we sell from outside producers and our ability to obtain such eggs at prices and in quantities acceptable to us could fluctuate.

We produced approximately 84%  of the total number of shell eggs we sold in fiscal 2019 and fiscal 2018, and purchased the remainder from other producers. As the wholesale price for shell eggs increases, our cost to acquire shell eggs from other producers increases. There can be no assurance that we will be able to continue to acquire shell eggs from other producers in sufficient quantities and satisfactory prices, and our inability to do so may have a material adverse effect on our business and profitability.

Our acquisition growth strategy subjects us to various risks.

We plan to continue to pursue a growth strategy, which includes acquisitions of other companies engaged in the production and sale of shell eggs. Acquisitions require capital resources and can divert management’s attention from our existing business. Acquisitions also entail an inherent risk that we could become subject to contingent or other liabilities, including liabilities arising from events or conduct prior to our acquisition of a business that were unknown to us at the time of acquisition. We could incur significantly greater expenditures in integrating an acquired business than we anticipated at the time of its purchase. We cannot assure you that we:

• will identify suitable acquisition candidates;

• can consummate acquisitions on acceptable terms;

• can successfully integrate an acquired business into our operations; or

• can successfully manage the operations of an acquired business.

No assurance can be given that companies we acquire in the future will contribute positively to our results of operations or financial condition. In addition, federal antitrust laws require regulatory approval of acquisitions that exceed certain threshold levels of significance.

The consideration we pay in connection with any acquisition also affects our financial results. If we pay cash, we could be required to use a portion of our available cash to consummate the acquisition. To the extent we issue shares of our Common Stock, existing stockholders may be diluted. In addition, acquisitions may result in the incurrence of debt.

Our largest customers have historically accounted for a significant portion of our net sales volume. Accordingly, our business may be adversely affected by the loss of, or reduced purchases by, one or more of our large customers.

For the fiscal years 2019, 2018, and 2017, two customers, Wal-Mart Stores and Sam’s Clubs, on a combined basis, accounted for 33.7%, 33.2%, and 28.9% of our net sales dollars, respectively.  For fiscal years 2019, 2018, and 2017, our top ten customers accounted for 69.8%,  69.4%, and 69.5% of net sales dollars, respectively. Although we have established long-term relationships with most of our customers, who continue to purchase from us based on our ability to service their needs, they are free to acquire shell eggs from other sources.  If, for any reason, one or more of our large customers were to purchase significantly less of our shell eggs in the future or terminate their purchases from us, and we are not able to sell our shell eggs to new customers at comparable levels, it would have a material adverse effect on our business, financial condition, and results of operations.  

Failure to comply with applicable governmental regulations, including environmental regulations, could harm our operating results, financial condition, and reputation.  Further, we may incur significant costs to comply with any such regulations.

We are subject to federal, state and local regulations relating to grading, quality control, labeling, sanitary control, waste disposal, and other areas of our business. As a fully-integrated shell egg producer, our shell egg facilities are subject to regulation and inspection by the USDA, EPA, and FDA, as well as regulation by various state and local health and agricultural agencies, among others. All of our shell egg production and feed mill facilities are subject to

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FDA regulation and inspections. In addition, rules are often proposed that, if adopted as proposed, could increase our costs.

Our operations and facilities are subject to various federal, state and local environmental, health, and safety laws and regulations governing, among other things, the generation, storage, handling, use, transportation, disposal, and remediation of hazardous materials. Under these laws and regulations, we are required to obtain permits from governmental authorities, including, but not limited to pollution/wastewater discharge permits.

If we fail to comply with an applicable law or regulation, or fail to obtain necessary permits, we could be subject to significant fines and penalties or other sanctions, our reputation could be harmed, and our operating results and financial condition could be materially adversely affected. In addition, because these laws and regulations are becoming increasingly more stringent, there can be no assurance that we will not be required to incur significant costs for compliance with such laws and regulations in the future.

Shell eggs and shell egg products are susceptible to microbial contamination, and we may be required to or voluntarily recall contaminated products.

Shell eggs and shell egg products are vulnerable to contamination by pathogens such as Salmonella.  Shipment of contaminated products, even if inadvertent, could result in a violation of law and lead to increased risk of exposure to product liability claims, product recalls and increased scrutiny by federal and state regulatory agencies.  In addition, products purchased from other producers could contain contaminants that might be inadvertently redistributed by us.  As such, we might decide or be required to recall a product if we or regulators believe it poses a potential health risk.  We do not maintain insurance to cover recall losses.  Any product recall could result in a loss of consumer confidence in our products, adversely affect our reputation with existing and potential customers and have a material adverse effect on our business, results of operations and financial condition.

Agricultural risks, including outbreaks of avian disease, could harm our business.    

Our shell egg production activities are subject to a variety of agricultural risks. Unusual or extreme weather conditions, disease and pests can materially and adversely affect the quality and quantity of shell eggs we produce and distribute.  The Company maintains controls and procedures to reduce the risk of exposing our flocks to harmful diseases.  Despite our efforts, outbreaks of avian disease can still occur and may adversely impact the health of our flocks.  An outbreak of avian disease could have a material adverse impact on our financial results by increasing government restrictions on the sale and distribution of our products.  Negative publicity from an outbreak within our industry can negatively impact customer perception, even if the outbreak does not directly impact our flocks.  If a substantial portion of our production facilities are affected by any of these factors in any given quarter or year, our business, financial condition, and results of operations could be materially and adversely affected.

From April through June 2015,  our industry experienced a significant avian influenza outbreak, primarily in the upper Midwestern U.S.  Based on several published industry estimates, we believe approximately 12% of the national flock of laying hens was affected.  The affected laying hens were either destroyed by the disease or euthanized.  The effect this outbreak had on our industry and our company is discussed throughout this report.  There have been no positive tests for avian influenza at any of our locations. We have significantly increased the biosecurity measures at all of our facilities; however we cannot be certain that our flocks will not be affected by AI or other diseases in the future. 

Our business is highly competitive.

The production and sale of fresh shell eggs, which accounted for virtually all of our net sales in recent years, is intensely competitive. We compete with a large number of competitors that may prove to be more successful than we are in marketing and selling shell eggs. We cannot provide assurance that we will be able to compete successfully with any or all of these companies. In addition, increased competition could result in price reductions, greater cyclicality, reduced margins and loss of market share, which would negatively affect our business, results of operations, and financial condition.

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Pressure from animal rights groups regarding the treatment of animals may subject us to additional costs to conform our practices to comply with developing standards or subject us to marketing costs to defend challenges to our current practices and protect our image with our customers.

We and many of our customers face pressure from animal rights groups, such as People for the Ethical Treatment of Animals ("PETA"), and the Humane Society of the United States ("HSUS"), to require all companies that supply food products operate their business in a manner that treats animals in conformity with certain standards developed or approved by these animal rights groups. The standards typically require minimum cage space for hens, among other requirements, but some of these groups have made legislative efforts to ban any form of caged housing in various states.  California’s Proposition 2 and Assembly Bill 1437 was effective January 1, 2015, and did increase the cost of production in that State and for producers who sell there. Additionally, in calendar 2018, California voters approved a referendum that mandates, over a period of time, that all egg production in California must be cage-free with specific space requirements for laying hens.  The referendum also requires that all eggs and egg products sold in the state of California must be cage-free by 2022. This referendum could affect sourcing and production of eggs in California, which would create uncertainty surrounding supply and pricing in other areas of the country. In recent years, many large restaurant chains, food service companies and grocery chains, including our largest customers, announced goals to transition to a cage-free egg supply chain by specified future dates.  Changing our procedures and infrastructure to conform to these types of laws or anticipated customer demand for these types of guidelines has resulted and will continue to result in additional costs to our internal production of shell eggs, including capital and operating cost increases from housing and husbandry practices and modification of existing or construction of new facilities, and the increased cost for us to purchase shell eggs from our outside suppliers. While some of the increased costs have been passed on to our customers, we cannot provide assurance that we can continue to pass on these costs, or additional costs we will incur, in the future. 

We are dependent on our management team, and the loss of any key member of this team may adversely affect the implementation of our business plan in a timely manner.

Our success depends largely upon the continued service of our senior management team. The loss or interruption of service of one or more of our key executive officers could adversely affect our ability to manage our operations effectively and/or pursue our growth strategy. We have not entered into any employment or non-compete agreements with any of our executive officers nor do we carry any significant key-man life insurance coverage on any such persons.  

We are controlled by the family of our founder, Fred R. Adams, Jr. and, after the death of Mr. Adams, we expect to be controlled by Adolphus B. Baker, our Chief Executive Officer and Chairman of the Board.

Fred R. Adams, Jr., our Founder and Chairman Emeritus, his spouse Mrs. Jean Adams and his son-in-law, Adolphus B. Baker, our Chief Executive Officer and Chairman of the Board beneficially own, directly or indirectly through related entities, 100% of our outstanding Class A Common Stock, controlling approximately 52.3% of the total voting power of the Company. Additionally, such persons also have additional voting power due to beneficial ownership of Common Stock, directly or indirectly through related entities, resulting in family voting control of approximately 65.5% of the total voting power of the Company.

Mr. Baker and Mrs. Adams share voting power over 100% of the Class A Common Stock and Mr. Adams’ beneficially owned Common Stock, and we expect that the Company will continue to be controlled by Mrs. Adams and Mr. Baker, acting jointly, until Mr. Adams' death. After Mr. Adams’ death, we expect there will be a change of control of the Company to Mr. Baker as the sole managing member of the limited liability company that owns all of the outstanding shares of Class A Common Stock.

We are and, after Mr. Adams’ death we expect to continue to be, a “controlled company” as defined in the NASDAQ’s listing standards. Accordingly, we are and we expect to continue to be exempt from certain requirements of NASDAQ’s corporate governance listing standards, including the requirement to maintain a majority of independent directors on our board of directors and the requirements regarding the determination of compensation of executive officers and nomination of directors by independent directors.

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We understand that the Adams and Baker families intend to retain ownership of a sufficient amount of Common Stock and Class A Common Stock to assure continued ownership of more than 50% of the voting power of our outstanding shares of capital stock. Such ownership will make an unsolicited acquisition of the Company more difficult and discourage certain types of transactions involving a change of control of our Company, including transactions in which the holders of Common Stock might otherwise receive a premium for their shares over then current market prices. The Adams and Baker families’ controlling ownership of our capital stock may adversely affect the market price of our Common Stock.

Sales, or the availability for sale, of substantial amounts of our Common Stock could adversely affect the market price of our Common Stock.

Following the death of Mr. Adams we expect that Mrs. Adams and Mr. Adams’ daughters, and certain other related entities (the “Stockholder Parties”), will hold approximately 12 million shares of Common Stock that are subject to an Agreement Regarding Common Stock (the "Subject Shares"), which Agreement is an exhibit to this report.

Pursuant to the Agreement Regarding Common Stock, the Company filed a Shelf Registration Statement and Prospectus dated October 9, 2018, pursuant to which these common shares will be eligible for sale in the amounts and on the terms described in the Agreement Regarding Common Stock. We anticipate that the Stockholder Parties would desire to sell a total of approximately 6.0 million shares of Common Stock in initial sales under the Shelf Registration Statement following Mr. Adams’ death.

The Agreement Regarding Common Stock provides that if any Stockholder Party intends to sell any of the Subject Shares, such party must give the Company a right of first refusal to purchase all or any of such shares. The price payable by the Company to purchase shares pursuant to the exercise of the right of first refusal will reflect a 6% discount to the then-current market price based on the 20 business-day volume weighted average price. If the Company does not exercise its right of first refusal and purchase the shares offered, such Stockholder Party will, subject to the approval of a special committee of independent directors of the Board of Directors, be permitted to sell the shares not purchased by the Company pursuant to a Company registration statement, Rule 144 under the Securities Act of 1933, or another manner of sale agreed to by the Company.

Although pursuant to the Agreement Regarding Common Stock the Company will have a right of first refusal to purchase all or any of those shares, the Company may elect not to exercise its rights of first refusal and if so such shares would be eligible for sale pursuant to the foregoing registration rights or pursuant to Rule 144 under the Securities Act of 1933. Sales, or the availability for sale, of a large number of shares of our Common Stock could result in a decline in the market price of our Common Stock.

Current and future litigation could expose us to significant liabilities and adversely affect our business reputation.

We and certain of our subsidiaries are involved in various legal proceedings.  Litigation is inherently unpredictable, and although we believe we have meaningful defenses in these matters, we may incur judgments or enter into settlements of claims that could have a material adverse effect on our results of operations, cash flow and financial condition.  For a discussion of legal proceedings see Item 3 below.  Such lawsuits are expensive to defend, divert management’s attention, and may result in significant judgments or settlements.  Legal proceedings may expose us to negative publicity, which could adversely affect our business reputation and customer preference for our products and brands.

Impairment in the carrying value of goodwill or other assets could negatively affect our results of operations or net worth.

Goodwill represents the excess of the cost of business acquisitions over the fair value of the identifiable net assets acquired.  Goodwill is reviewed at least annually for impairment by assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  As of June 1, 2019, we had $35.5 million of goodwill.  While we believe

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the current carrying value of this goodwill is not impaired, any future goodwill impairment charges could adversely affect our results of operations in any particular period or our net worth.

The loss of any registered trademark or other intellectual property could enable other companies to compete more effectively with us.

We utilize intellectual property in our business.  For example, we own the trademarks Farmhouse®,  Sunups®,  Sunny Meadow® and 4Grain®.  We produce and market Egg-Land’s Best® and Land O’ Lakes® under license agreements with EB.  We have invested a significant amount of money in establishing and promoting our trademarked brands.  The loss or expiration of any intellectual property could enable other companies to compete more effectively with us by allowing our competitors to make and sell products substantially similar to those we offer.  This could negatively impact our ability to produce and sell the associated products, thereby adversely affecting our operations.

Extreme weather, natural disasters or other events beyond our control could negatively impact our business.

Fire, bioterrorism, pandemic, extreme weather or natural disasters, including droughts, floods, excessive cold or heat, hurricanes or other storms, could impair the health or growth of our flocks, production or availability of feed ingredients, or interfere with our operations due to power outages, fuel shortages, discharges from overtopped or breached wastewater treatment lagoons, damage to our production and processing facilities or disruption of transportation channels, among other things. Any of these factors could have a material adverse effect on our financial results.

Failure of our information technology systems or software, or a security breach of those systems, could adversely affect our day-to-day operations and decision making processes and have an adverse effect on our performance.

The efficient operation of our business depends on our information technology systems. We rely on our information technology systems to effectively manage our business data, communications, logistics, accounting and other business processes. If we do not allocate and effectively manage the resources necessary to build and sustain an appropriate technology environment, our business or financial results could be negatively impacted. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including systems failures, viruses, ransomware, security breaches or cyber incidents such as intentional cyber-attacks aimed at theft of sensitive data or inadvertent cyber-security compromises.

A security breach of such information could result in damage to our reputation and negatively impact our relations with our customers or employees. Any such damage or interruption could have a material adverse effect on our business.

We currently participate in several joint ventures and may participate in other joint ventures in the future. We could be adversely affected if any of our joint venture partners are unable or unwilling to fulfill their obligations or if we have disagreements with any of our joint venture partners that are not satisfactorily resolved.

We currently have investments in and commitments to several joint ventures and we may participate in other joint ventures in the future. Under existing joint venture agreements, we and our joint venture partners could be required to, among other things, provide guarantees of obligations or contribute additional capital and we may have little or no control over the amount or timing of these obligations. If our joint venture partners are unable or unwilling to fulfill their obligations or if we have any unresolved disagreements with our joint venture partners, we may be required to fulfill those obligations alone, expend additional resources to continue development of projects, or we may be required to write down our investments at amounts that could be significant.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

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We operate farms, processing plants, hatcheries, feed mills, warehouses, offices and other properties located in Alabama, Arkansas, Florida, Georgia, Kansas, Kentucky, Louisiana, Mississippi, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Texas and Utah. As of June 1, 2019, the facilities included three breeding facilities, two hatcheries, six wholesale distribution centers, 23 feed mills, 42 shell egg production facilities, 28 pullet growing facilities, 43 processing and packing facilities, and one egg products facility.  We also own a significant interest in a company that owns an egg products facility, which is consolidated in our financial statements. Most of our operations are conducted from properties we own.

As of June 1, 2019, we owned approximately 27,458 acres of land in various locations throughout our geographic market area. We have the ability to hatch 21.2 million pullet chicks annually, grow 26.2 million pullets annually, house 44.4 million laying hens, and control the production of 40.3 million layers, with the remainder controlled by contract growers. We own mills that can produce 766 tons of feed per hour, and processing facilities capable of processing approximately 500,000 dozen shell eggs per hour.

Over the past five fiscal years, our capital expenditures, excluding acquisitions of shell egg production and processing facilities from others, have totaled an aggregate amount of approximately $312.7 million. 

ITEM 3.  LEGAL PROCEEDINGS

Egg Antitrust Litigation

On September 25, 2008, the Company was named as one of several defendants in numerous antitrust cases involving the United States shell egg industry. The cases were consolidated into In re: Processed Egg Products Antitrust Litigation, No. 2:08-md-02002-GP, in the United States District Court for the Eastern District of Pennsylvania (the “District Court”), in three groups of cases - the “Direct Purchaser Putative Class Action”, the “Indirect Purchaser Putative Class Action” and the “Non-Class Cases.”

The Direct Purchaser Putative Class Action. The named plaintiffs in these cases alleged that they purchased eggs or egg products directly from a defendant and sued on behalf of themselves and a putative class of others who claimed to be similarly situated.  As previously reported, in November 2014, the District Court approved the Company’s settlement with the direct purchaser plaintiff class and entered final judgment dismissing with prejudice the class members’ claims against the Company.

The Indirect Purchaser Putative Class Action.  The named plaintiffs in these cases are individuals or companies who allege that they purchased shell eggs indirectly from one or more of the defendants - that is, they purchased from retailers that had previously purchased from defendants or other parties - and sued on behalf of themselves and a putative class of others who claim to be similarly situated. The District Court denied the indirect purchaser plaintiffs’ motion for class certification. On June 28, 2018, the Company entered into a settlement agreement with the indirect purchaser plaintiffs, for an immaterial amount, and on July 17, 2018, the Court entered an order dismissing all indirect purchaser plaintiffs’ claims against the Company and other defendants.

The Non-Class Cases. In the remaining cases, the named plaintiffs allege that they purchased shell eggs and egg products directly from one or more of the defendants but sue only for their own alleged damages and not on behalf of a putative class.  On April 4, 2018, the Court entered a final judgement dismissing all claims against the Company brought by the following non-class plaintiffs: The Kroger Co.; Publix Super Markets, Inc.; SUPERVALU, Inc.; Safeway, Inc.; Albertsons LLC; H.E. Butt Grocery Co.; The Great Atlantic & Pacific Tea Company, Inc.; Walgreen Co.; Hy-Vee, Inc.; and Giant Eagle, Inc., with prejudice, pursuant to the Company’s previously announced $80.8 million settlement with the named plaintiffs.

The Company settled all Non-Class cases except for the claims of certain plaintiffs who sought substantial damages allegedly arising from the purchase of egg products (as opposed to shell eggs). As previously reported, the Company settled all claims brought by one of these plaintiffs, Conopco, Inc. on a confidential basis and for an amount that did not have a material impact on the Company’s financial condition or results, and on November 21, 2018, the Court entered a final judgment dismissing Conopco’s claims against the Company. The remaining plaintiffs are Kraft Food Global, Inc., General Mills, Inc., Nestle USA, Inc., and The Kellogg Company (“Egg Products Plaintiffs”). The Egg

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Products Plaintiffs seek treble damages and injunctive relief under the Sherman Act and are attacking certain features of the UEP animal-welfare guidelines and program used by the Company and many other egg producers. On September 6, 2016, the District Court granted defendants’ motion for summary judgment and dismissed with prejudice all claims based on the purchase of egg products. That ruling was appealed to the United States Court of Appeals for the Third Circuit, and on January 22, 2018, the Third Circuit reversed the District Court’s grant of summary judgment and remanded the case to the District Court. Even though the appealing egg-products plaintiffs had asked the Third Circuit to remand the case for trial, the Third Circuit declined, instead remanding the case for further proceedings, including the suggestion that the District Court determine whether the egg-products plaintiffs had sufficient evidence of causation and damages to submit the case to a jury. On March 5, 2018, defendants filed a motion in the District Court seeking leave to file a motion for summary judgment in light of the remand statements in the Third Circuit’s opinion. The Egg Products Plaintiffs opposed that motion, and on March 26, 2018, the defendants filed a reply in support of the motion. On July 16, 2018, the court granted the defendants’ motion for leave and on August 17, 2018, defendants filed their motions for summary judgment and requested oral argument. The plaintiffs filed their responses on September 21, 2018, and sur-replies on October 19, 2018, and the defendants filed their replies on October 12, 2018. On December 19, 2018, the District Court heard oral argument on the renewed motions for summary judgment, and on June 11, 2019, denied the defendants’ motions for summary judgement. On July 2, 2019, the Egg Products Plaintiffs filed a motion seeking to have the case remanded to federal court in Chicago, where it was initially filed, for trial.  The District Court has not ruled on that motion.

Allegations in Each Case. In all of the cases described above, the plaintiffs allege that the Company and certain other large domestic egg producers conspired to reduce the domestic supply of eggs in a concerted effort to raise the price of eggs to artificially high levels. In each case, plaintiffs allege that all defendants agreed to reduce the domestic supply of eggs by: (a) agreeing to limit production; (b) manipulating egg exports; and (c) implementing industry-wide animal welfare guidelines that reduced the number of hens and eggs.

The Company intends to continue to defend the remaining case as vigorously as possible based on defenses which the Company believes are meritorious and provable.  While management believes that the likelihood of a material adverse outcome in the overall egg antitrust litigation has been significantly reduced as a result of the settlements and rulings described above, there is still a reasonable possibility of a material adverse outcome in the remaining egg antitrust litigation. At the present time, however, it is not possible to estimate the amount of monetary exposure, if any, to the Company because of this remaining case.  Adjustments, if any, which might result from the resolution of these remaining legal matters, have not been reflected in the financial statements.

State of Oklahoma Watershed Pollution Litigation

On June 18, 2005, the State of Oklahoma filed suit, in the United States District Court for the Northern District of Oklahoma, against Cal-Maine Foods, Inc. and Tyson Foods, Inc. and affiliates, Cobb-Vantress, Inc., Cargill, Inc. and its affiliate, George’s, Inc. and its affiliate, Peterson Farms, Inc. and Simmons Foods, Inc. The State of Oklahoma claims that through the disposal of chicken litter the defendants have polluted the Illinois River Watershed. This watershed provides water to eastern Oklahoma. The complaint seeks injunctive relief and monetary damages, but the claim for monetary damages has been dismissed by the court. Cal-Maine Foods, Inc. discontinued operations in the watershed. Accordingly, we do not anticipate that Cal-Maine Foods, Inc. will be materially affected by the request for injunctive relief unless the court orders substantial affirmative remediation. Since the litigation began, Cal-Maine Foods, Inc. purchased 100% of the membership interests of Benton County Foods, LLC, which is an ongoing commercial shell egg operation within the Illinois River Watershed. Benton County Foods, LLC is not a defendant in the litigation.

The trial in the case began in September 2009 and concluded in February 2010. The case was tried to the court without a jury and the court has not yet issued its ruling. Management believes the risk of material loss related to this matter to be remote.

Other Matters

In addition to the above, 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,

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is of the opinion that the final outcome should not have a material effect on the Company’s consolidated results of operations or financial position.

At this time, it is not possible for us to predict the ultimate outcome of the matters set forth above.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II.

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock is traded on the NASDAQ Global Select Market under the symbol “CALM”.  

There is no public trading market for the Class A Common Stock.  All outstanding Class A shares are owned by a limited liability company of which Adolphus Baker, our Chairman and Chief Executive Officer and son-in-law of our founder Fred R. Adams, Jr., is the sole managing member and will be voted at the direction of Mr. Baker and Mrs. Jean Adams (our founder's spouse) acting jointly. After the death of Mr. Adams, such shares will be voted at the direction of Mr. Baker. For additional information about our capital stock, see Note 13 to the Notes to the Consolidated Financial Statements.

Issuer Purchases of Equity Securities

There were no purchases of our Common Stock made by or on behalf of our company or any affiliated purchaser during our fiscal 2019 fourth quarter.

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Stock Performance Graph

The following graph shows a comparison of cumulative total shareholder return, calculated on a dividend reinvested basis, for the Company, the NASDAQ Composite Total Return, and the NASDAQ 100 Total Return for the five years ended June 1, 2019. As the only publicly held company in the shell egg business, the Company uses the NASDAQ 100 Total Return index in lieu of a published industry index or peer group. The graph assumes $100 was invested on May 31, 2014 in the stock or index. Each date plotted indicates the last day of a fiscal quarter.

Stockholders

At July 18, 2019, there were approximately 318 record holders of our Common Stock and approximately 35,982 beneficial owners whose shares were held by nominees or broker dealers.

Dividends 

Cal-Maine has a dividend policy adopted by its Board of Directors.  Pursuant to the policy, Cal-Maine pays a dividend to shareholders of its Common Stock and Class A Common Stock on a quarterly basis for each quarter for which the Company reports net income attributable to Cal-Maine Foods, Inc. computed in accordance with generally accepted accounting principles in an amount equal to one-third (1/3) of such quarterly income. Dividends are paid to shareholders of record as of the 60th day following the last day of such quarter, except for the fourth fiscal quarter.  For the fourth quarter, the Company will pay dividends to shareholders of record on the 65th day after the quarter end. Dividends are payable on the 15th day following the record date. Following a quarter for which the Company does not report net income attributable to Cal-Maine Foods, Inc., the Company will not pay a dividend for a subsequent profitable quarter until the Company is profitable on a cumulative basis computed from the date of the last quarter for which a dividend was paid.  The Company’s loan agreements provide that unless otherwise approved by its lenders, the Company must

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limit dividends paid in any quarter to not exceed an amount equal to one-third of the previous quarter’s consolidated net income, which dividends are allowed to be paid if there are no events of default.

Recent Sales of Unregistered Securities

No sales of securities without registration under the Securities Act of 1933 occurred during our fiscal year ended June 1, 2019.

Securities Authorized for Issuance under Equity Compensation Plans

Equity Compensation Plan Information
	(a)	(b)		(c)
	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)
Equity compensation plans approved by shareholders	—	$	—	336,052
Equity compensation plans not approved by shareholders	—	—		—
Total	—	$	—	336,052

(a) There were no outstanding options, warrants or rights as of June 1, 2019.  There were 248,412 shares of restricted stock outstanding under our 2012 Omnibus Long-Term Incentive Plan as of June 1, 2019.

(b) There were no outstanding options, warrants or rights as of June 1, 2019.

(c) Shares available for future issuance as of June 1, 2019 under our 2012 Omnibus Long-Term Incentive Plan. 

For additional information, see Note 10 to Notes to Consolidated Financial Statements.

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ITEM 6.  SELECTED FINANCIAL DATA

	Fiscal Years Ended
Statement of Operations Data (in thousands, except per share data)	June 1, 2019*			June 2, 2018†			June 3, 2017^			May 28, 2016			May 30, 2015
	52 weeks			52 weeks			53 weeks			52 weeks			52 weeks
Net sales	$	1,361,188		$	1,502,932		$	1,074,513		$	1,908,650		$	1,576,128
Cost of sales	1,138,329			1,141,886			1,028,963			1,260,576			1,180,407
Gross profit	222,859			361,046			45,550			648,074			395,721
Selling, general and administrative	174,795			179,316			176,032			177,760			160,386
Legal settlement expense - See Note 12	2,250			80,750			—			—			—
Loss (gain) on disposal of fixed assets	33			473			3,664			(1,563		)	568
Operating income (loss)	45,781			100,507			(134,146		)	471,877			234,767
Other income (expense):
Interest expense	(644		)	(265		)	(318		)	(1,156		)	(2,313		)
Interest income	7,978			3,697			3,103			4,314			1,798
Patronage dividends	10,482			8,286			7,665			6,930			6,893
Equity in income of affiliates	4,776			3,517			1,390			5,016			2,657
Other, net	2,432			1,595			8,012			268			2,747
Total other income	25,024			16,830			19,852			15,372			11,782
Income (loss) before income tax and noncontrolling interest	70,805			117,337			(114,294		)	487,249			246,549
Income tax expense (benefit)	15,743			(8,859		)	(39,867		)	169,202			84,268
Net income (loss) including noncontrolling interest	55,062			126,196			(74,427		)	318,047			162,281
Less: Net income (loss) attributable to noncontrolling interest	833			264			(149		)	2,006			1,027
Net income (loss) attributable to Cal-Maine Foods, Inc.	$	54,229		$	125,932		$	(74,278	)	$	316,041		$	161,254
Net income (loss) per common share:
Basic	$	1.12		$	2.60		$	(1.54	)	$	6.56		$	3.35
Diluted	$	1.12		$	2.60		$	(1.54	)	$	6.53		$	3.33
Cash dividends per common share	$	0.51		$	0.35		$	—		$	2.18		$	1.11
Weighted average shares outstanding:
Basic	48,467			48,353			48,362			48,195			48,136
Diluted	48,589			48,468			48,362			48,365			48,437
Balance Sheet Data (in thousands)
Working capital	$	492,846		$	479,682		$	371,527		$	542,832		$	407,418
Total assets	1,156,278			1,150,447			1,033,094			1,111,765			928,653
Total debt (including current maturities)	2,337			6,090			10,939			25,570			50,860
Total stockholders’ equity	989,806			955,682			844,493			917,361			704,562
Operating Data:
Total number of layers at period-end (thousands)	36,192			36,340			36,086			33,922			33,696
Total shell eggs sold (millions of dozens)	1,038.9			1,037.7			1,031.1			1,053.6			1,063.1

*        Results for fiscal 2019 include the results of operations (subsequent to acquisition) of the commercial egg assets acquired from Featherland Egg Farms, Inc., which were consolidated with our operations as of October 14, 2018.

† Results for fiscal 2018 include tax benefit related to the Tax Cuts and Jobs Act tax reform legislation and the subsequent revaluation of the Company's deferred tax liabilities at the new, lower tax rates.

^ Results for fiscal 2017 include the results of operations (subsequent to acquisition) of the commercial egg assets acquired from Foodonics International, Inc., which were consolidated with our operations as of October 16, 2016, and the commercial egg assets of Happy Hen Egg Farms, Inc., which were consolidated with our operations as of February 19, 2017.

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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

RISK FACTORS; FORWARD-LOOKING STATEMENTS

For information relating to important risks and uncertainties that could materially adversely affect our business, securities, financial condition or operating results, reference is made to the disclosure set forth under Item 1A above under the caption “Risk Factors.” In addition, because the following discussion includes numerous forward-looking statements relating to us, our results of operations, financial condition and business, reference is made to the information set forth in the section of Part I immediately preceding Item 1 above under the caption “Forward-Looking Statements.”

OVERVIEW

Cal-Maine Foods, Inc. (“we,” “us,” “our,” or the “Company”) is primarily engaged in the production, grading, packaging, marketing and distribution of fresh shell eggs. Our fiscal year end is the Saturday nearest to May 31 which was June 1, 2019 (52 weeks),  June 2, 2018 (52 weeks), and June 3, 2017 (53 weeks) for the most recent three fiscal years.

Our operations are fully integrated.  We hatch chicks, grow and maintain flocks of pullets (female chickens, under 18 weeks of age), layers (mature female chickens) and breeders (male and female birds used to produce fertile eggs to be hatched for egg production flocks), manufacture feed, and produce, process and distribute shell eggs. We are the largest producer and marketer of shell eggs in the U.S.  We market the majority of our shell eggs in the southwestern, southeastern, mid-western, and mid-Atlantic regions of the U.S.  We market shell eggs through our extensive distribution network to a diverse group of customers, including national and regional grocery store chains, club stores, foodservice distributors, and egg product consumers.

Our operating results are directly tied to egg prices, which are highly volatile and subject to wide fluctuations, and are outside of our control. For example, the Urner-Barry Southeastern Regional Large Egg Market Price per dozen eggs, for our fiscal 2006-2019 ranged from a low of $0.55 during fiscal 2006 to a high of $3.00 during fiscal 2018.  The shell egg industry has traditionally been subject to periods of high profitability followed by periods of significant loss. In the past, during periods of high profitability, shell egg producers tended to increase the number of layers in production with a resulting increase in the supply of shell eggs, which generally caused a drop in shell egg prices until supply and demand returned to balance.  As a result, our financial results from year to year may vary significantly.   Shorter term, retail sales of shell eggs historically have been greatest during the fall and winter months and lowest during the summer months.  Our need for working capital generally is highest in the last and first fiscal quarters ending in May/June and August/September, respectively, when egg prices are normally at seasonal lows.   Prices for shell eggs fluctuate in response to seasonal factors and a natural increase in shell egg production in the spring and early summer.  Shell egg prices tend to increase with the start of the school year and are highest prior to holiday periods, particularly Thanksgiving, Christmas, and Easter.  Consequently, we generally experience lower sales and net income in our first and fourth fiscal quarters ending in August/September and May/June, respectively. Because of the seasonal and quarterly fluctuations, comparisons of our sales and operating results between different quarters within a single fiscal year are not necessarily meaningful comparisons.

From April through June 2015, our industry experienced a significant avian influenza (“AI”) outbreak, primarily in the upper Midwestern U.S.  There were no positive tests for AI at any of our locations. Based on several published industry estimates, we believe approximately 12% of the national flock of laying hens was affected.  During April through June 2015, the affected laying hens were either destroyed by the disease or euthanized. The USDA data showed the supply of laying hens decreased substantially. Since that time, it recovered and eventually exceeded pre-AI levels by late 2016. In 2017, the national flock grew approximately 1% over the prior year's levels. In 2018 flock levels began to grow at more rapid pace, ending the year approximately 3% higher than 2017. This growth has continued as recent USDA reports show the hatch rate increased 2% year over year for the first five months of calendar 2019. Given this trend, the increase in the U.S. laying hen flock and excess shell egg supply could continue to create pricing pressure.

22

Egg prices increased significantly during the summer and fall of 2015. The average Urner-Barry Thursday prices for the large market (i.e. generic shell eggs) in the southeastern region for the months of June through November 2015 was $2.32 per dozen, with a peak of $2.97 in August.  Subsequent to November 2015, shell egg prices declined. The Urner Barry price index ("UB index") hit a decade-low level in both our fiscal 2016 fourth quarter and our fiscal 2017 second quarter. In fiscal 2018, non-specialty shell egg prices rebounded significantly due to strong demand before falling again in fiscal 2019 based on oversupply issues. These fluctuations illustrate the volatility of our industry.  Our net average selling price per dozen shell eggs for fiscal 2019 decreased to $1.265 compared to $1.397 for fiscal 2018, including a decrease in non-specialty shell egg prices to $1.041 in fiscal 2019 compared to $1.226 in fiscal 2018.

We are one of the largest producers and marketers of value-added specialty shell eggs in the U.S. For accounting purposes, we classify nutritionally enhanced, cage-free, organic and brown eggs as specialty shell eggs. Specialty shell eggs have been a significant and growing segment of the market in recent years. In recent years, a significant number of large restaurant chains, food service companies and grocery chains, including our largest customers, announced goals to transition to a cage-free egg supply chain by specified future dates. We are working with our customers to achieve smooth progress in meeting their goals. Our focus for future expansion at our farms will be environments that are cage-free or with equipment that can easily be converted to cage-free, based on a timeline to meet our customer’s needs.

For fiscal 2019, we produced approximately 84% of the total number of shell eggs sold by us, with approximately 9% of such shell egg production provided by contract producers. Contract producers utilize their facilities to produce shell eggs from layers owned by us. We own the shell eggs produced under these arrangements. For fiscal 2019, approximately 16% of the total number of shell eggs sold by us were purchased from outside producers for resale.

Our cost of production is materially affected by feed costs, which are highly volatile and subject to wide fluctuation.  For fiscal 2019, feed costs averaged about 57% of our total farm egg production cost.  Changes in market prices for corn and soybean meal, the primary ingredients in the feed we use, result in changes in our cost of goods sold.   For our last five fiscal years, average feed cost per dozen sold ranged from a low of $0.39 in fiscal 2018 to a high of $0.44 in fiscal 2015.  The cost of our primary feed ingredients, which are commodities, are subject to factors over which we have little or no control such as volatile price changes caused by weather, size of harvest, transportation and storage costs, demand and the agricultural and energy policies of the U.S. and foreign governments. Looking forward to 2020, grain prices are trending higher as historic rainfall and flooding through the early growing season are adversely affecting this year’s corn and soybean crops. However, ongoing uncertainties and geopolitical issues surrounding trade agreements and international tariffs led to reduced exports and downward pressure on recent grain prices. As such, we expect our feed costs to be more volatile and potentially higher in fiscal 2020.

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RESULTS OF OPERATIONS

The following table sets forth, for the fiscal years indicated, certain items from our consolidated statements of operations expressed as a percentage of net sales.

	June 1, 2019		June 2, 2018		June 3, 2017
Net sales	100.0	%	100.0	%	100.0	%
Cost of sales	83.6	%	76.0	%	95.8	%
Gross profit	16.4	%	24.0	%	4.2	%
Selling, general and administrative	12.8	%	11.9	%	16.4	%
Legal settlement expense	0.2	%	5.4	%	—	%
Loss on disposal of fixed assets	—	%	—	%	0.3	%
Operating income (loss)	3.4	%	6.7	%	(12.5	)%
Other income	1.8	%	1.1	%	1.8	%
Income (loss) before income taxes and noncontrolling interest	5.2	%	7.8	%	(10.6	)%
Income tax expense (benefit)	1.2	%	(0.6	)%	(3.7	)%
Net income (loss) including noncontrolling interest	4.0	%	8.4	%	(6.9	)%
Less:  Net income (loss) attributable to noncontrolling interest	—	%	—	%	—	%
Net income (loss) attributable to Cal-Maine Foods, Inc.	4.0	%	8.4	%	(6.9	)%

Executive Overview of Results – Fiscal Years Ended June 1, 2019,  June 2, 2018, and June 3, 2017

Our operating results are significantly affected by wholesale shell egg market prices and feed costs, which can fluctuate widely and are outside of our control.  The majority of our shell eggs are sold at independently quoted wholesale market prices for shell eggs or formulas related to our costs of production which include the cost of corn and soybean meal.  The following table shows our net income (loss), gross profit, net average shell egg selling price, the average Urner Barry wholesale large shell egg prices in the southeast region, and feed cost per dozen produced for each of our three most recent fiscal years. 

Fiscal Year ended	June 1, 2019		June 2, 2018		June 3, 2017
Net income (loss) attributable to Cal-Maine Foods, Inc. - (in thousands)	$	54,229	$	125,932	$	(74,278	)
Gross profit (in thousands)	222,859		361,046		45,550
Net average shell egg selling price (rounded)	1.27		1.40		1.01
Average Urner Barry Spot Egg Market Quotations 1	1.23		1.49		0.85
Feed cost per dozen produced	0.415		0.394		0.399

1- Average Thursday price for the large market (i.e. generic shell eggs) in the southeastern region

The shell egg industry has historically been subject to periods of high profitability followed by periods of significant loss. The periods of high profitability have often reflected increased consumer demand relative to supply while the periods of significant loss have often reflected excess supply for the then prevailing consumer demand.  Historically, demand for shell eggs increases in line with overall population growth. As reflected above, our operating results fluctuate with changes in the spot egg market quote and feed costs.   The net average shell egg selling price is the blended price for all sizes and grades of shell eggs, including non-graded shell egg sales, breaking stock and undergrades.  In fiscal 2017, our net average selling price and dozens sold decreased over the previous fiscal year primarily due to the oversupply of eggs resulting from the repopulation of the national flock of laying hens to levels exceeding the flock size prior to the avian influenza outbreak in 2015, along with a reduced demand for egg products.  In fiscal 2018, strong demand resulted in an increase in our average selling price and dozens sold, and feed costs decreased over prior years. Fiscal 2019 saw an increasing U.S. flock size result in oversupply of eggs, particularly in the last half of the fiscal year. This resulted in decreased gross profit and net income for fiscal 2019.

24

Fiscal Year Ended June 1, 2019 Compared to Fiscal Year Ended June 2, 2018

NET SALES

Net sales for the fiscal year ended June 1, 2019 were $1,361.2 million, a decrease of $141.7 million, or 9.4%, from net sales of $1,502.9 million for fiscal 2018. The decrease was primarily due to lower selling prices for non-specialty eggs in fiscal 2019 due to the oversupply of eggs, particularly in the last half of the fiscal year, contrasted with fiscal 2018 in which we experienced strong demand resulting in higher prices for non-specialty eggs.

In fiscal 2019, shell egg sales made up approximately 97% of our net sales. Total dozens sold in fiscal 2019 were 1,038.9 million, an increase of 1.2 million dozen, or  0.1%, compared to 1,037.7 million sold in fiscal 2018 resulting in an increase in net sales of $1.7 million for fiscal 2019 compared with the prior year.

Net average selling price of shell eggs decreased from $1.397 per dozen for fiscal 2018 to $1.265 per dozen for fiscal 2019, a decrease of $0.132 per dozen, or 9.4%, primarily reflecting an abundance of eggs in the market.  The decrease in sales price in fiscal 2019 from fiscal 2018 resulted in a corresponding decrease in net sales of approximately $137.1 million. Our operating results are significantly affected by wholesale shell egg market prices, which are outside of our control. Small changes in production or demand levels can have a large effect on shell egg prices.

Egg products accounted for approximately 3% of our net sales. These revenues were $41.5 million for the fiscal year ended June 1, 2019 compared with $43.5 million for the fiscal 2018.

The table below represents an analysis of our non-specialty and specialty, as well as co-pack specialty, shell egg sales.  Following the table is a discussion of the information presented in the table.  

	Fiscal Years Ended								Quarters Ended
	June 1, 2019				June 2, 2018				June 1, 2019				June 2, 2018
	(Amounts in thousands)								(Amounts in thousands)
Net sales	$	1,361,188			$	1,502,932			$	280,572			$	443,095
Shell egg sales:
Non-specialty	810,306		61.4	%	956,909		65.6	%	150,860		55.5	%	294,892		68.8	%
Specialty	478,057		36.2	%	467,469		32.0	%	113,835		41.9	%	124,400		29.0	%
Co-pack specialty	26,112		2.0	%	26,092		1.8	%	6,057		2.2	%	7,216		1.7	%
Other	5,205		0.4	%	8,943		0.6	%	968		0.4	%	2,152		0.5	%
Net shell egg sales	$	1,319,680	100.0	%	$	1,459,413	100.0	%	$	271,720	100.0	%	$	428,660	100.0	%
As a percent of net sales			97	%			97	%			97	%			97	%
Dozens sold:
Non-specialty	778,052		74.9	%	780,362		75.2	%	192,310		75.5	%	184,301		73.1	%
Specialty	247,614		23.8	%	244,022		23.5	%	59,390		23.3	%	64,081		25.5	%
Co-pack specialty	13,234		1.3	%	13,329		1.3	%	3,072		1.2	%	3,573		1.4	%
Total dozens sold	1,038,900		100.0	%	1,037,713		100.0	%	254,772		100.0	%	251,955		100.0	%
Net average selling price per dozen:
All shell eggs	$	1.265			$	1.397			$	1.062			$	1.694
Non-specialty	$	1.041			$	1.226			$	0.784			$	1.600
Specialty	$	1.931			$	1.916			$	1.917			$	1.941

25

Non-specialty shell eggs include all shell egg sales not specifically identified as specialty or co-pack specialty shell egg sales.   This market is characterized generally by an inelasticity of demand, and small increases in production or decreases in demand can have a large adverse effect on prices and vice-versa.  In fiscal 2019, non-specialty shell eggs represented approximately 61.4% of our shell egg revenue, compared to 65.6% for fiscal 2018, reflecting the large decrease in net average selling price for non-specialty eggs from $1.226 per dozen in fiscal 2018 to $1.041 per dozen in fiscal 2019.  Sales of non-specialty shell eggs accounted for approximately 74.9% and 75.2% of total shell egg volume in fiscal 2019 and 2018, respectively.

For the thirteen-week period ended June 1, 2019, non-specialty shell eggs represented approximately 55.5% of our shell egg revenue, compared to 68.8% for the thirteen-week period ended June 2, 2018, reflecting the large decrease in net average selling price for non-specialty eggs during the fourth quarter of fiscal 2019 compared to the same period of last year ($0.784 per dozen in the 2019 period compared to $1.600 per dozen in the 2018 period).   For the thirteen-week period ended June 1, 2019, non-specialty shell eggs accounted for approximately 75.5% of the total shell egg volume, compared to 73.1% for the thirteen-week period ended June 2, 2018. The volume increase for non-specialty shell eggs for the fiscal 2019 fourth quarter reflected the lower average selling prices in the period.

Specialty eggs, which include nutritionally enhanced, cage-free, organic and brown eggs, continued to make up a significant portion of our total shell egg revenue and dozens sold in fiscal 2019.  For fiscal 2019, specialty eggs accounted for 36.2% of shell egg revenue, compared to 32.0% in fiscal 2018. Specialty eggs accounted for 23.8% of shell egg volume in fiscal 2019 compared with 23.5% fiscal 2018.  Additionally, for fiscal 2019, specialty eggs sold through co-pack arrangements accounted for 2.0% of shell egg revenue, compared to 1.8% in fiscal 2018, and 1.3% of shell egg volume in fiscal 2019 compared to 1.3% in fiscal 2018.  Our net average selling price for specialty eggs was $1.931 per dozen for fiscal 2019 compared to $1.916 per dozen for fiscal 2018. Specialty egg retail prices are less cyclical than non-specialty shell egg prices and are generally higher due to consumer willingness to pay for the perceived increased benefits from these products. This effect was particularly evident in recent years as non-specialty egg prices declined in fiscal 2019 compared fiscal 2018, while specialty egg prices remained much more stable.

For the thirteen-week period ended June 1, 2019, specialty shell eggs and specialty shell eggs sold through co-pack arrangements represented approximately 41.9% and 2.2%, respectively, of our shell egg revenue, compared to 29.0% and 1.7%, respectively, for the thirteen-week period ended June 2, 2018.   For the thirteen-week period ended June 1, 2019, specialty shell eggs and specialty shell eggs sold through co-pack arrangements accounted for approximately 23.3% and 1.2%, respectively, of the total shell egg volume, compared to 25.5% and 1.4%, respectively, for the thirteen-week period ended June 3, 2018. Our net average selling price for specialty shell eggs and specialty shell eggs sold through co-pack arrangements was $1.917 per dozen for the fiscal 2019 fourth quarter compared to $1.941 per dozen for the fiscal 2018 fourth quarter.

The shell egg sales classified as “Other sales” represent hard cooked eggs, hatching eggs, other egg products, hens, and manure, which are included with our shell egg operations.

Egg products are shell eggs that are broken and sold in liquid, frozen, or dried form.  Our egg products are sold through our wholly-owned subsidiary American Egg Products, LLC (“AEP”) and our majority owned subsidiary Texas Egg Products, LLC (“TEP”).  For fiscal 2019 egg product sales were $41.5 million, a decrease of $2.0 million, or 4.6%, compared to $43.5 million for fiscal 2018.  Egg products volume for fiscal 2019 was 60.8 million pounds, a decrease of 5.2 million pounds, or 7.9%, compared to 66.0 million pounds for fiscal 2018. In fiscal 2019, the selling price per pound was $0.682 compared to $0.659 for fiscal 2018, an increase of 3.5%. The decline in revenue attributable to lower volume was partially offset by higher selling prices.

26

COST OF SALES

Cost of sales consists of costs directly related to producing, processing and packing shell eggs, purchases of shell eggs from outside producers, processing and packing of liquid and frozen egg products and other non-egg costs.  Farm production costs are those costs incurred at the egg production facility, including feed, facility, hen amortization, and other related farm production costs.    The following table presents the key variables affecting our cost of sales:

	Fiscal Year Ended						Quarter Ended
(Amounts in thousands)	June 1, 2019		June 2, 2018		Percent Change		June 1, 2019		June 2, 2018		Percent Change
Cost of sales:
Farm production	$	635,797	$	603,887	5.3	%	$	162,142	$	155,471	4.3	%
Processing and packaging	222,765		214,078		4.1	%	55,584		53,734		3.4	%
Outside egg purchases and other	249,605		287,472		(13.2	)%	44,509		81,623		(45.5	)%
Total shell eggs	1,108,167		1,105,437		0.2	%	262,235		290,828		(9.8	)%
Egg products	29,020		35,551		(18.4	)%	5,139		10,743		(52.2	)%
Other	1,142		898		27.2	%	444		308		44.2	%
Total	$	1,138,329	$	1,141,886	(0.3	)%	$	267,818	$	301,879	(11.3	)%
Farm production cost (per dozen produced)
Feed	$	0.415	$	0.394	5.3	%	$	0.411	$	0.416	(1.2	)%
Other	0.319		0.303		5.3	%	0.328		0.311		5.5	%
Total	$	0.734	$	0.697	5.3	%	$	0.739	$	0.727	1.7	%
Outside egg purchases (average cost per dozen)	$	1.26	$	1.45	(13.1	)%	$	1.05	$	1.82	(42.3	)%
Dozen produced	876,705		873,307		0.4	%	222,625		215,729		3.2	%
Dozen sold	1,038,900		1,037,713		0.1	%	254,772		251,955		1.1	%

Cost of sales for the fiscal year ended June 1, 2019 was $1,138.3 million, a decrease of $3.6 million, or 0.3%, compared to $1,141.9 million for fiscal 2018.  Comparing fiscal 2019 to fiscal 2018, average cost per dozen purchased from outside shell egg producers decreased while cost of feed ingredients and dozens produced increased.  For the 2019 fiscal year we produced 84.4% of the eggs sold by us, as compared to 84.2% for the previous year. Feed cost for fiscal 2019 was $0.415 per dozen, compared to $0.394 per dozen for the prior fiscal year, an increase of 5.3%.  The increase in feed costs was primarily related to less favorable crop conditions in the south central U. S., which resulted in higher ingredient prices at some of our larger feed mill operations. The increase in feed cost per dozen resulted in an increase in cost of sales of $18.4 million for fiscal 2019 compared with fiscal 2018. 

For the thirteen weeks ended June 1, 2019, compared to the thirteen weeks ended June 2, 2018, cost of sales decreased $34.1 million, or 11.3%, from $301.9 million in the fourth quarter of fiscal 2018, to $267.8 million in the fourth quarter of fiscal 2019.  Average cost per dozen purchased from outside shell egg producers decreased 42.3% due to significantly lower egg selling prices in the quarter. Feed cost per dozen for the fourth quarter of fiscal 2019 was $0.411, compared to $0.416 for the same quarter of fiscal 2018, a decrease of 1.2%.

Gross profit, as a percentage of net sales, was 16.4% for fiscal 2019, compared to 24.0% for fiscal 2018. The decrease resulted primarily from lower selling prices for non-specialty eggs.

27

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

	Fiscal Years Ended
(Amounts in thousands)	June 1, 2019		June 2, 2018		Change			Percent Change
Specialty egg	$	53,263	$	54,300	$	(1,037	)	(1.9	)%
Delivery expense	53,595		53,177		418			0.8	%
Payroll and overhead	38,343		37,191		1,152			3.1	%
Stock compensation	3,619		3,467		152			4.4	%
Other expenses	25,975		31,181		(5,206		)	(16.7	)%
Total	$	174,795	$	179,316	$	(4,521	)	(2.5	)%

Selling, general and administrative expenses ("SG&A"), which include costs of marketing, distribution, accounting and corporate overhead, were  $174.8 million in fiscal 2019, a decrease of $4.5 million, or 2.5%, compared to fiscal 2018.  As a percent of net sales, selling, general and administrative expense increased from 11.9% in fiscal 2018 to 12.8% in fiscal 2019, due to the decrease in net sales in fiscal 2019.

Payroll and overhead increased $1.2 million, or 3.1%, compared to the same period of last year primarily due to annual salary increases.  As a percentage of net sales, payroll and overhead is 2.8% and 2.5% for fiscal 2019 and 2018, respectively.  As a percentage of net sales, delivery expense is 3.9% and 3.5% for fiscal 2019 and 2018, respectively. Other expenses decreased $5.2 million, or 16.7%, primarily due to reduced legal expense as a result of the Company's settlement of several antitrust claims in the prior year. The fiscal 2018 amount also included costs associated with preparation for the Company's special shareholders meeting held in July 2018. Insurance expense, which is also a part of other expenses, was flat year over year due to decreases in the Company's liability for incurred but not reported claims being offset by overall increases in premiums for fiscal 2019 compared with fiscal 2018.

	Quarters Ended
(Amounts in thousands)	June 1, 2019		June 2, 2018		Change			Percent Change
Specialty egg	$	12,290	$	16,878	$	(4,588	)	(27.2	)%
Delivery expense	13,450		13,496		(46		)	(0.3	)%
Payroll and overhead	9,498		10,024		(526		)	(5.2	)%
Stock compensation	999		888		111			12.5	%
Other expenses	6,059		8,364		(2,305		)	(27.6	)%
Total	$	42,296	$	49,650	$	(7,354	)	(14.8	)%

SG&A expense was $42.3 million for the thirteen weeks ended June 1, 2019, a decrease of $7.4 million, or 14.8%, compared to $49.7 million for the thirteen weeks ended June 2, 2018. The decrease in specialty egg expense for the fiscal 2019 fourth quarter is attributable to the timing of advertising and promotions as well as a decrease in specialty egg dozens sold resulting in decreased franchise expense. Payroll and overhead decreased $526,000, or 5.2%, compared to the same period of last year due to timing of bonus accruals. Stock compensation expense relates to the amortization of compensation expense for grants of restricted stock and is dependent on the closing prices of the Company's stock on the grant dates. The weighted average grant date fair value of our restricted stock awards at June 1, 2019, was $43.20, a 2.1% increase over the value of $42.30 at June 2, 2018.  Other expenses decreased 27.6% from $8.4 million for the thirteen weeks ended June 2, 2018 to $6.1 million for the same period of fiscal 2019 primarily due to a reduction in the liability for incurred but not reported insurance claims at June 1, 2019 as well as a reduction in legal expenses.

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LEGAL SETTLEMENT EXPENSE

Legal settlement expense for fiscal 2019 was $2.3 million compared to $80.8 million for fiscal 2018, primarily reflecting settlements of antitrust claims against the Company.

LOSS ON DISPOSAL OF FIXED ASSETS

We recorded losses on disposal of fixed assets of $33,000 and $473,000 for fiscal 2019 and 2018, respectively, due to the retirement of layer houses at certain locations in the prior year period.

OPERATING INCOME

As a result of the above, our operating income was $45.8 million for fiscal 2019, compared to $100.5 million for fiscal 2018.

OTHER INCOME (EXPENSE)

Total other income (expense) consists of income (expenses) not directly charged to, or related to, operations such as interest expense, interest income, patronage dividends, and equity in earnings of affiliates, among other items. Total other income for fiscal 2019 was $25.0 million compared to $16.8 million for fiscal 2018.  As a percent of net sales, total other income was 1.8% for fiscal 2019, compared to 1.1% for fiscal 2018.

The Company recorded interest income of $8.0 million in fiscal 2019, compared to $3.7 million for fiscal 2018. We recorded interest expense of $643,000 and $482,000 in fiscal 2019 and 2018, respectively, of which zero was capitalized in fiscal 2019 compared with $217,000 in fiscal 2018.  Interest income from available for sale securities increased due to higher average invested balances and higher rates earned.

Patronage dividends, which represent distributions from our membership in Eggland's Best, Inc., increased $2.2 million from $8.3 million in fiscal 2018 to $10.5 million in fiscal 2019.

Equity in income of affiliates for fiscal 2019 was $4.8 million compared to $3.5 million for fiscal 2018.  The increase of $1.3 million is primarily due to improved results at our Red River joint venture.

Other, net for fiscal 2019 was income of $2.4 million compared to a loss of $1.6 million for fiscal 2018. The increase is primarily due to a current year increase in royalty income, which represents fees paid to us for sales made by other producers in one of our Eggland's Best franchise areas.

INCOME TAXES

For the fiscal year ended June 1, 2019, our pre-tax income was $70.8 million, compared to $117.3 million for fiscal 2018. Income tax expense of $15.7 million was recorded for fiscal 2019 compared to income tax benefit of $8.9 million for fiscal 2018. Our fiscal 2019 effective tax rate increased to 22.5% from 7.6% in fiscal 2018, driven primarily by the impact of the Tax Cuts and Jobs Act of 2017 (the "Act”) on fiscal 2018. The Act, which was signed by the President in December 2017, among other matters, reduced the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. In fiscal 2018, the Company recorded a $43 million tax benefit primarily related to the remeasurement of certain deferred tax assets and liabilities.

At June 1, 2019, the Company had an income tax receivable of $9.7 million compared to an income tax payable of $17.4 million at June 2, 2018. The change is primarily due to losses during the fourth quarter of fiscal 2019 reducing the estimated tax liability for the fiscal year below the estimated tax payments already made.

For the thirteen weeks ended June 1, 2019, our pretax loss was $27.9 million and our income tax benefit was $8.4 million with an effective tax rate of 29.8%.

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Items causing our effective rate to differ from the federal statutory income tax rate of 21% are state income taxes, certain federal tax credits and certain items included in income or loss for financial reporting purposes that are not included in taxable income or loss for income tax purposes, including tax exempt interest income, certain nondeductible expenses, and net income or loss attributable to noncontrolling interest.

NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

Net income attributable to noncontrolling interest for fiscal 2019 was $833,000 compared to $264,000 for fiscal 2018. Our noncontrolling interest relates to the Company's majority owned subsidiary, Texas Egg Products, LLC.

NET INCOME (LOSS) ATTRIBUTABLE TO CAL-MAINE FOODS, INC.

As a result of the above, net income for fiscal 2019 was $54.2 million, or $1.12 per basic and diluted share, compared to $125.9 million, or $2.60 per basic and diluted share for fiscal 2018. 

Fiscal Year Ended June 2, 2018 Compared to Fiscal Year Ended June 3, 2017

The discussion of our results of operations for the fiscal year ended June 2, 2018 compared to the fiscal year ended June 3, 2017 can be found in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's fiscal 2018 Annual Report on Form 10-K. 

CAPITAL RESOURCES AND LIQUIDITY

Our working capital at June 1, 2019 was $492.8 million, compared to $479.7 million at June 2, 2018. The calculation of working capital is defined as current assets less current liabilities.  Our current ratio was 7.58 at June 1, 2019 compared to 5.45 at June 2, 2018. The current ratio is calculated by dividing current assets by current liabilities.  Our need for working capital generally is highest in the last and first fiscal quarters ending in May/June and August/September, respectively, when egg prices are normally at seasonal lows.  

Our long-term debt and capital leases at June 1, 2019, including current maturities, amounted to $2.3 million, compared to $6.1 million at June 2, 2018.  On July 10, 2018, we entered into a $100.0 million Senior Secured Revolving Credit Facility (the "Revolving Credit Facility"). No amounts were borrowed under the facility during fiscal 2019 or as of July 19, 2019. At June 1, 2019, we had $4.2 million in outstanding standby letters of credit, of which $3.7 million were secured by our Revolving Credit Facility with the remainder collateralized with cash.  See Note 8 in the Notes to Consolidated Financial Statements for information regarding our long-term debt instruments.

Net cash provided by operating activities was $115.1 million for fiscal year 2019 compared with $200.4 million for fiscal year 2018.  Decreased gross profit margins resulting from lower egg prices contributed greatly to our decrease in cash flow from operations.

For fiscal 2019, approximately $209.8 million was provided from the sale and maturity of short-term investments, $177.0 million was used to purchase short-term investments and net payments of $7.9 million were received from investments in unconsolidated entities.   We used $17.9 million to acquire Featherland Egg Farms. We invested $4.3 million in unconsolidated entities.  Approximately $68.0 million was used to purchase property, plant and equipment.  Refer to the table of material construction projects presented below for additional information on purchases of property, plant and equipment.  Approximately $3.8 million was used for principal payments on long-term debt and $41.7 million for the payment of dividends.  The net result of these and other activities as of June 1, 2019 was an increase in cash of $20.8 million from June 2, 2018.

For the fiscal year ended June 2, 2018, $200.4 million in net cash was provided by operating activities. Approximately $127.7 million was provided from the sale of short-term investments, $275.3 million was used to purchase short-term investments and net payments of $6.6 million were received from notes receivable and investments in affiliates.   We

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invested $4.1 million in the Red River Valley Egg Farm LLC joint venture.  Approximately $19.7 million was used to purchase property, plant and equipment.  Approximately $4.8 million was used for principal payments on long-term debt.  The net result of these and other activities as of June 2, 2018 was an increase in cash of $30.9 million from June 3, 2017.

As of June 1, 2019, we had one note payable with a principal balance of $1.5 million maturing in fiscal 2020. Certain property, plant, and equipment is pledged as collateral on our note payable.  Unless otherwise approved by our lender, we are required by provisions of our loan agreement governing the note to (1) maintain minimum levels of working capital (current ratio of not less than 1.25 to 1) and net worth (minimum of $90.0 million tangible net worth, plus 45% of cumulative net income since the fiscal year ended May 28, 2005); (2) limit dividends paid in any given quarter to not exceed an amount equal to one-third of the previous quarter’s consolidated net income (allowed if no events of default); (3) maintain minimum total funded debt to total capitalization (debt to total tangible capitalization ratio not to exceed 55%); and (4) maintain various cash-flow coverage ratios (1.25 to 1), among other restrictions. Our debt agreement requires Fred R. Adams, Jr., our Founder and Chairman Emeritus, or his family, to maintain ownership of Company shares, directly or indirectly, representing not less than 50% of the outstanding voting power of the Company. 

As of June 1, 2019, we had no balance outstanding on our Revolving Credit Facility. We had $3.7 million in outstanding standby letters of credit secured by the Revolving Credit Facility. The credit agreement governing our Revolving Credit Facility contains customary covenants including restrictions on the incurrence of liens, incurrence of additional debt, sales of assets and other fundamental corporate changes and investments. The credit agreement requires maintenance of two financial covenants (i) a minimum working capital ratio of 2.00 to 1.00 and (ii) an annual limit on capital expenditures of $100.0 million. Additionally, the credit agreement requires that Fred R. Adams Jr., his spouse, natural children, sons-in-law or grandchildren, or any trust, guardianship, conservatorship or custodianship for the primary benefit of any of the foregoing, or any family limited partnership, similar limited liability company or other entity that 100% of the voting control of such entity is held by any of the foregoing, shall maintain at least 50% of the Company’s voting stock. Failure to satisfy any of these covenants will constitute a default under the terms of the credit agreement. In addition, under the terms of the credit agreement, dividends are restricted to the Company’s current dividend policy of one-third of the Company’s net income computed in accordance with generally accepted accounting principles. The Company is allowed to repurchase up to $75.0 million of its capital stock in any year provided there is no default under the credit agreement and the borrower has availability of at least $20.0 million under the Revolving Credit Facility. For additional information about our Revolving Credit Facility, see Note 8 to Notes to Consolidated Financial Statements.

At June 1, 2019, we were in compliance with the covenants in our loan agreement.

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In recent years we have made significant investments in new and remodeled facilities to meet the increasing demand for cage-free, organic and other specialty eggs, including through our Red River Valley Egg Farm LLC joint venture. Additionally, the following table represents material construction projects approved as of July 19, 2019 (in thousands):    

Project	Location	Projected Completion	Projected Cost		Spent as of June 1, 2019		Remaining Projected Cost
Convertible/Cage-Free Layer Houses	Pittsburg, TX	July 2019	$	11,069	$	9,711	$	1,358
Convertible/Cage-Free Layer Houses	Lake City, FL	September 2019	11,782		8,383		3,399
Convertible/Cage-Free Layer Houses	Harwood, TX	November 2019	12,505		10,173		2,332
Convertible/Cage-Free Layer Houses	Bushnell, FL	January 2020	11,543		2,103		9,440
Convertible/Cage-Free Layer Houses	Bushnell, FL	February 2020	6,151		245		5,906
Cage-Free Pullet Houses	Zephyrhills, FL	February 2020	6,332		2		6,330
Convertible/Cage-Free Layer & Pullet Houses	Pittsburg, TX	October 2020	25,550		397		25,153
Convertible/Cage-Free Layer Houses	Delta, UT	February 2021	17,177		1,631		15,546
Cage-Free Layer & Pullet Houses/Processing Facilty	Delta, UT	February 2022	84,664		208		84,456
			$	186,773	$	32,853	$	153,920

Looking forward to the next fiscal year, we believe current cash balances, investments, borrowing capacity, and cash flows from operations will be sufficient to fund our current and projected capital needs.

CONTRACTUAL OBLIGATIONS         

The following table summarizes by fiscal year the future estimated cash payments, in thousands, to be made under existing contractual obligations. Further information on debt obligations is contained in Note 8, and on lease obligations in Note 7, in the Notes to the Consolidated Financial Statements.    

	Total		2020		2021		2022		2023		2024		Thereafter
Long-Term Debt & Capital Leases (Principal)	$	2,554	$	1,696	$	205	$	215	$	224	$	214	$	—
Long-Term Debt & Capital Leases (Interest)	148		70		34		25		15		4		—
Operating Leases	1,953		641		593		487		215		17		—
Total	$	4,655	$	2,407	$	832	$	727	$	454	$	235	$	—

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

For information on changes in accounting principles and new accounting principles, see “Impact of Recently Issued Accounting Standards” in Note 1 to the Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with U.S. generally accepted accounting standards 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.

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Management suggests our Summary of Significant Accounting Policies, as described in Note 1 of the notes to consolidated financial statements, be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations. We believe the critical accounting policies that most impact our consolidated financial statements are described below.

INVESTMENTS IN SECURITIES AVAILABLE-FOR-SALE

Our investment securities are accounted for in accordance with ASC 320, “Investments-Debt and Equity Securities” (“ASC 320”).  The Company considers all investment securities for which there is a determinable fair market value and no restrictions on the Company's ability to sell within the next 12 months as available-for-sale, and carries them at fair value, with unrealized gains and losses reported as a separate component of stockholders' equity. Realized gains and losses are included in other income. The cost basis for realized gains and losses on available-for-sale securities is determined on the specific identification method.

ALLOWANCE FOR DOUBTFUL ACCOUNTS    

In the normal course of business, we extend credit to our customers on a short-term basis.  Although credit risk associated with our customers is considered minimal, we routinely review our accounts receivable balances and make provisions for probable doubtful accounts. In circumstances where management is aware of a specific customer’s inability to meet its financial obligations to us (e.g. bankruptcy filings), a specific reserve is recorded to reduce the receivable to the amount expected to be collected.  For all other customers, we recognize reserves for bad debt based on the length of time the receivables are past due, generally 100% for amounts more than 60 days past due.

INVENTORIES  

Inventories of eggs, feed, supplies and flocks are valued principally at the lower of cost (first-in, first-out method) or net realizable value.  If market prices for eggs and feed grains move substantially lower, we record adjustments to write-down the carrying values of eggs and feed inventories to fair market value. The cost associated with flock inventories, consisting principally of chick purchases, feed, labor, contractor payments and overhead costs, are accumulated during the growing period of approximately 22 weeks.  Capitalized flock costs are then amortized over the flock’s productive life, generally one to two years.  Flock mortality is charged to cost of sales as incurred.  High mortality from disease or extreme temperatures will result in abnormal write-downs to flock inventories.  Management continually monitors each flock and attempts to take appropriate actions to minimize the risk of mortality loss.

LONG-LIVED ASSETS

Depreciable long-lived assets are primarily comprised of buildings, improvements, machinery and equipment.  Depreciation is provided by the straight-line method over the estimated useful lives, which are 15 to 25 years for buildings and improvements 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.  When property and equipment are retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations. We continually reevaluate the carrying value of our long-lived assets, for events or changes in circumstances which indicate the carrying value may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition.  If the sum of the expected future cash flows (undiscounted and without interest charges) are less than the carrying amount of the asset, an impairment loss is recognized to reduce the carrying value of the asset to it's estimated fair value.

INTANGIBLE ASSETS

Included in other intangible assets are separable intangible assets acquired in business acquisitions, which include franchise fees, non-compete agreements and customer relationship intangibles. They are amortized over their estimated useful lives of 5 to 15 years.   The gross cost and accumulated amortization of intangible assets are removed when the recorded amounts are fully amortized and the asset is no longer in use.  

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EQUITY AND COST METHOD INVESTMENTS

We have invested in other companies engaged in the production, processing and distribution of shell eggs and egg products.  These investments are recorded using the cost or equity method, and are not consolidated in our financial statements.  Changes in the ownership percentages of these investments might alter the accounting methods currently used. Our investment in these companies amounted to $63.3 million at June 1, 2019 and is shown on the Company’s Consolidated Balance Sheet in the amounts presented for "Investment in unconsolidated entities" and “Other long-lived assets”. The combined total assets and total liabilities of these companies were approximately $298.5 million and $43.1 million, respectively, at June 1, 2019.

GOODWILL

Goodwill is evaluated for impairment annually by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary.  After assessing the totality of events or circumstances, if we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform additional quantitative tests to determine the magnitude of any impairment.

At June 1, 2019, goodwill represented 3.1% of total assets and 3.6% of stockholders’ equity.  Goodwill relates to the following (in thousands):

Fiscal Year	Description	Amount
1999	Acquisition of Hudson Brothers, Inc.	$	3,147
2006	Acquisition of Hillandale Farms, LLC	869
2007	Acquisition of Green Forest Foods, LLC	179
2008	Revised Hillandale incremental purchase price	9,257
2009	Revised Hillandale incremental purchase price	2,527
2009	Acquisition of Zephyr Egg, LLC	1,876
2009	Acquisition of Tampa Farms, LLC	4,600
2010	Revised Hillandale incremental purchase price	(338		)
2013	Acquisition of Maxim Production Co., Inc.	2,300
2014	Purchase of joint venture partner’s 50% in Delta Egg	4,779
2017	Acquisition of Foodonics International, Inc.	3,389
2017	Acquisition of Happy Hen Egg Farms, Inc.	2,940
	Total Goodwill	$	35,525

REVENUE RECOGNITION AND DELIVERY COSTS

Revenue recognition is completed upon satisfaction of the performance obligation to the customer, which typically occurs within days of the Company and customer agreeing upon the order.  See Note 17: Revenue Recognition in the Notes to the Consolidated Financial Statements for further discussion of the policy.

The Company believes the performance obligation is met upon delivery and acceptance of the product by our customers. Costs to deliver product to customers are included in selling, general and administrative expenses in the accompanying Consolidated Statements of Operations and totaled $53.6 million, $53.2 million, and $53.3 million in fiscal years 2019, 2018, and 2017, respectively.  Sales revenue reported in the accompanying Consolidated Statements of Operations is reduced to reflect estimated returns and allowances.  The Company records an estimated sales allowance for returns and discounts at the time of sale using historical trends based on actual sales returns and sales.

SALES INCENTIVES PROVIDED TO CUSTOMERS

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The Company periodically provides incentive offers to its customers to encourage purchases. Such offers include current discount offers (e.g., percentage discounts off current purchases), inducement offers (e.g., offers for future discounts subject to a minimum current purchase), and other similar offers. Current discount offers, when accepted by customers, are treated as a reduction to the sales price of the related transaction, while inducement offers, when accepted by customers, are treated as a reduction to sales price based on estimated future redemption rates. Redemption rates are estimated using the Company’s historical experience for similar inducement offers. Current discount and inducement offers are presented as a net amount in ‘‘Net sales.’’

STOCK BASED COMPENSATION

We account for share-based compensation in accordance with ASC 718, “Compensation-Stock Compensation” (“ASC 718”).  ASC 718 requires all share-based payments to employees, including grants of employee stock options, restricted stock and performance-based shares to be recognized in the statement of operations based on their fair values. ASC 718 requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow.  See Note 10: Stock Compensation Plans in the Notes to the Consolidated Financial Statements for more information.

INCOME TAXES

We determine our effective tax rate by estimating our permanent differences resulting from differing treatment of items for tax and accounting purposes.  We are periodically audited by taxing authorities.  Any audit adjustments affecting permanent differences could have an impact on our effective tax rate.