CAL-MAINE FOODS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS Cal-Maine Foods, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in thousands, except for par value amounts) February 26, 2022 May 29, 2021 Assets Current assets: Cash and cash equivalents $ 15,589 $ 57,352 Investment securities available-for-sale 81,125 112,158 Trade and other receivables, net 138,654 84,123 Income tax receivable 41,383 42,516 Inventories 240,087 218,375 Prepaid expenses and other current assets 5,872 5,407 Total current assets 522,710 519,931 Property, plant & equipment, net 671,373 589,417 Finance lease right-of-use asset, net 409 525 Operating lease right-of-use asset, net 1,168 1,724 Investments in unconsolidated entities 15,794 54,941 Goodwill 44,006 35,525 Intangible assets, net 18,686 20,341 Other long-term assets 7,849 6,770 Total Assets $ 1,281,995 $ 1,229,174 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable and accrued expenses $ 120,665 $ 89,191 Current portion of finance lease obligation 222 215 Current portion of operating lease obligation 486 691 Total current liabilities 121,373 90,097 Long-term finance lease obligation 271 438 Long-term operating lease obligation 682 1,034 Other noncurrent liabilities 10,673 10,416 Deferred income taxes, net 118,753 114,408 Total liabilities 251,752 216,393 Commitments and contingencies - see Note 13 — — Stockholders’ equity: Common stock ($ 0.01 par value): Common stock - authorized 120,000 shares, issued 70,261 shares 703 703 Class A convertible common stock - authorized and issued 4,800 shares 48 48 Paid-in capital 66,909 64,044 Retained earnings 992,523 975,977 Accumulated other comprehensive loss, net of tax ( 1,413 ) ( 558 ) Common stock in treasury at cost – 26,121 shares at February 26, 2022 and 26,202 shares at May 29, 2021 ( 28,439 ) ( 27,433 ) Total Cal-Maine Foods, Inc. stockholders’ equity 1,030,331 1,012,781 Noncontrolling interest in consolidated entity ( 88 ) — Total stockholders’ equity 1,030,243 1,012,781 Total Liabilities and Stockholders’ Equity $ 1,281,995 $ 1,229,174 See Notes to Condensed Consolidated Financial Statements. Index 4 Cal-Maine Foods, Inc. and Subsidiaries Condensed Consolidated Statements of Income (in thousands, except per share amounts) (unaudited) Thirteen Weeks Ended Thirty-nine Weeks Ended February 26, 2022 February 27, 2021 February 26, 2022 February 27, 2021 Net sales $ 477,485 $ 359,080 $ 1,184,195 $ 999,189 Cost of sales 385,903 311,563 1,042,221 876,457 Gross profit 91,582 47,517 141,974 122,732 Selling, general and administrative 52,686 47,656 146,991 135,494 (Gain) loss on disposal of fixed assets ( 674 ) 354 ( 2,855 ) 476 Operating income (loss) 39,570 ( 493 ) ( 2,162 ) ( 13,238 ) Other income (expense): Interest income, net 79 591 440 2,181 Royalty income 326 321 877 906 Patronage dividends 10,120 9,004 10,120 9,004 Equity income of unconsolidated entities 1,809 1,872 2,208 1,886 Other, net 1,144 537 8,169 1,485 Total other income, net 13,478 12,325 21,814 15,462 Income before income taxes 53,048 11,832 19,652 2,224 Income tax expense (benefit) 13,594 ( 1,716 ) ( 2,921 ) ( 4,080 ) Net income 39,454 13,548 22,573 6,304 Less: Loss attributable to noncontrolling interest ( 63 ) — ( 91 ) — Net income attributable to Cal-Maine Foods, Inc. $ 39,517 $ 13,548 $ 22,664 $ 6,304 Net income per common share: Basic $ 0.81 $ 0.28 $ 0.46 $ 0.13 Diluted $ 0.81 $ 0.28 $ 0.46 $ 0.13 Weighted average shares outstanding: Basic 48,886 48,530 48,888 48,511 Diluted 49,036 48,659 49,035 48,649 See Notes to Condensed Consolidated Financial Statements. Index 5 Cal-Maine Foods, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (in thousands) (unaudited) Thirteen Weeks Ended Thirty-nine Weeks Ended February 26, 2022 February 27, 2021 February 26, 2022 February 27, 2021 Net income $ 39,454 $ 13,548 $ 22,573 $ 6,304 Other comprehensive income (loss), before tax: Unrealized holding loss on available-for-sale securities, net of reclassification adjustments ( 551 ) ( 378 ) ( 1,130 ) ( 283 ) Income tax benefit related to items of other comprehensive income 134 92 275 69 Other comprehensive loss, net of tax ( 417 ) ( 286 ) ( 855 ) ( 214 ) Comprehensive income 39,037 13,262 21,718 6,090 Less: Comprehensive loss attributable to the noncontrolling interest ( 63 ) — ( 91 ) — Comprehensive income attributable to Cal-Maine Foods, Inc. $ 39,100 $ 13,262 $ 21,809 $ 6,090 See Notes to Condensed Consolidated Financial Statements. Index 6 Cal-Maine Foods, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) Thirty-nine Weeks Ended February 26, 2022 February 27, 2021 Cash flows from operating activities: Net income $ 22,573 $ 6,304 Depreciation and amortization 50,996 44,391 Deferred income taxes ( 3,861 ) 9,970 Other adjustments, net ( 48,884 ) ( 45,936 ) Net cash provided by operations 20,824 14,729 Cash flows from investing activities: Purchases of investment securities ( 47,135 ) ( 59,415 ) Sales and maturities of investment securities 76,377 85,202 Investment in unconsolidated entities ( 3,000 ) — Distributions from unconsolidated entities 400 5,813 Acquisition of business, net of cash acquired ( 44,823 ) — Purchases of property, plant and equipment ( 49,170 ) ( 73,796 ) Net proceeds from disposal of property, plant and equipment 6,041 3,273 Net cash used in investing activities ( 61,310 ) ( 38,923 ) Cash flows from financing activities: Purchase of common stock by treasury ( 1,120 ) ( 871 ) Principal payments on finance lease ( 160 ) ( 153 ) Contributions 3 5 Net cash used in financing activities ( 1,277 ) ( 1,019 ) Net change in cash and cash equivalents ( 41,763 ) ( 25,213 ) Cash and cash equivalents at beginning of period 57,352 78,130 Cash and cash equivalents at end of period $ 15,589 $ 52,917 Supplemental Information: Cash paid for operating leases $ 625 $ 703 Interest paid $ 230 $ 193 See Notes to Condensed Consolidated Financial Statements. Index 7 Cal-Maine Foods, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) Note 1 - Summary of Significant Accounting Policies Basis of Presentation The unaudited condensed consolidated financial statements of Cal-Maine Foods, Inc. and its subsidiaries (the "Company," "we," "us," "our") have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Therefore, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America ("GAAP") for complete financial statements and should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended May 29, 2021 (the "2021 Annual Report"). These statements reflect all adjustments that are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented and, in the opinion of management, consist of adjustments of a normal recurring nature. Operating results for the interim periods are not necessarily indicative of operating results for the entire fiscal year. Fiscal Year The Company's fiscal year ends on the Saturday closest to May 31. Each of the three-month periods and year-to-date periods ended on February 26, 2022 and February 27, 2021 included 13 weeks and 39 weeks, respectively . Use of Estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The severity, magnitude and duration, as well as the economic consequences of the COVID-19 pandemic, are uncertain, rapidly changing and difficult to predict. Therefore, our accounting estimates and assumptions might change materially in future periods in response to COVID-19. Investment Securities Our investment securities are accounted for in accordance with ASC 320, “Investments - Debt and Equity Securities” (“ASC 320”). The Company considers all its debt securities for which there is a determinable fair market value, and there are no restrictions on the Company's ability to sell within the next 12 months, as available-for-sale. We classify these securities as current, because the amounts invested are available for current operations. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of stockholders’ equity. The Company regularly evaluates changes to the rating of its debt securities by credit agencies and economic conditions to assess and record any expected credit losses through the allowance for credit losses, limited to the amount that fair value was less than the amortized cost basis. The cost basis for realized gains and losses on available-for-sale securities is determined by the specific identification method. Gains and losses are recognized in other income (expenses) as Other, net in the Company's Condensed Consolidated Statements of Income. Investments in mutual funds are classified as “Other long-term assets” in the Company’s Condensed Consolidated Balance Sheets. Trade Receivables Trade receivables are stated at their carrying values, which include a reserve for credit losses. At February 26, 2022 and May 29, 2021, reserves for credit losses were $ 725 thousand and $ 795 thousand, respectively. The Company extends credit to customers based on an evaluation of each customer's financial condition and credit history. Collateral is generally not required. The Company minimizes exposure to counter party credit risk through credit analysis and approvals, credit limits, and monitoring procedures. In determining our reserve for credit losses, receivables are assigned an expected loss based on historical loss information adjusted as needed for economic and other forward-looking factors. Business Combinations The Company applies fair value accounting guidance to measure non-financial assets and liabilities associated with business acquisitions. These assets and liabilities are measured at fair value for the initial purchase price allocation. The fair value of Index 8 non-financial assets acquired is determined internally. Our internal valuation methodology for non-financial assets considers the remaining estimated life of the assets acquired and what management believes is the market value for those assets. Change in Accounting Principle Effective May 31, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which is intended to improve financial reporting by requiring more timely recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The guidance replaces the prior “incurred loss” approach with an “expected loss” model and requires measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The Company adopted the guidance on a modified retrospective basis through a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The Company evaluated its current methodology of estimating allowance for doubtful accounts and the risk profile of its receivables portfolio and developed a model that includes the qualitative and forecasting aspects of the “expected loss” model under the amended guidance. The Company finalized its assessment of the impact of the amended guidance and recorded a $ 422 thousand cumulative increase to retained earnings at May 31, 2020. Immaterial Error Correction Effective on May 30, 2021, the Company acquired the remaining 50 % membership interest in Red River Valley Egg Farm, LLC (“Red River”), including certain liabilities. During the Company’s third quarter of fiscal 2022, management determined that it had not properly eliminated select intercompany sales and cost of sales transactions between Red River and the corresponding other wholly-owned subsidiaries of the Company in its first and second quarter 2022 Condensed Consolidated Statements of Income. The errors resulted in an overstatement of Net Sales and Cost of Sales of $ 6.7 million in the first quarter of fiscal 2022 and $ 9.2 million in the second quarter of fiscal 2022. There was no impact to Operating income (loss), Net income (loss) or Net income (loss) per share. We evaluated the errors quantitatively and qualitatively in accordance with Staff Accounting Bulletin ("SAB") No. 99 Materiality, and SAB No. 108 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements, and determined that the related impact was not material to our condensed consolidated financial statements for the first or second quarters of fiscal 2022, but that correcting the cumulative impact of the errors would be relevant to our Condensed Consolidated Statements of Income for the third quarter ended February 26, 2022. Accordingly, we have reflected the correction of the immaterial errors as a reduction of Net Sales and Cost of Sales in the accompanying Condensed Consolidated Statements of Income for the thirty-nine weeks ended February 26, 2022. Note 2 – Acquisition Effective on May 30, 2021, the Company acquired the remaining 50 % membership interest in Red River Valley Egg Farm, LLC (“Red River”), including certain liabilities. As a result of the acquisition, Red River became a wholly owned subsidiary of the Company. Red River owns and operates a specialty shell egg production complex with approximately 1.7 million cage-free laying hens, cage-free pullet capacity, feed mill, processing plant, related offices and outbuildings and related equipment located on approximately 400 acres near Bogata, Texas. Index 9 The following table summarizes the consideration paid for Red River and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date: Cash consideration paid $ 48,500 Fair value of the Company's equity interest in Red River held before the business combination 48,500 $ 97,000 Recognized amounts of identifiable assets acquired and liabilities assumed Cash $ 3,677 Accounts receivable, net 1,980 Inventory 8,789 Property, plant and equipment 85,002 Liabilities assumed ( 2,448 ) Deferred income taxes ( 8,481 ) Total identifiable net assets 88,519 Goodwill 8,481 $ 97,000 Cash and accounts receivable acquired along with liabilities assumed were valued at their carrying value which approximates fair value due to the short maturity of these instruments. Inventory consisted primarily of flock, feed ingredients, packaging, and egg inventory. Flock inventory was valued at carrying value as management believes that their carrying value best approximates their fair value. Feed ingredients, packaging and egg inventory were all valued based on market prices as of May 30, 2021. Property, plant and equipment were valued utilizing the cost approach which is based on replacement or reproduction costs of the assets and subtracting any depreciation resulting from physical deterioration and/or functional or economic obsolescence. The Company recognized a gain of $ 4.5 million as a result of remeasuring to fair value its 50 % equity interest in Red River held before the business combination. The gain was recorded in other income and expense under the heading “Other, net” in the Company’s Condensed Consolidated Statements of Income. The acquisition of Red River resulted in a discrete tax benefit of $ 8.3 million, which includes a $ 7.3 million decrease in deferred income tax expense related to the outside-basis of our equity investment in Red River, with a corresponding non-recurring, non-cash $ 954,000 reduction to income taxes expense on the non-taxable remeasurement gain associated with the acquisition. As part of the acquisition accounting, the Company also recorded an $ 8.5 million deferred tax liability for the difference in the inside-basis of the acquired assets and liabilities assumed. The recognition of deferred tax liabilities resulted in the recognition of goodwill. None of the goodwill recognized is expected to be deductible for income tax purposes. Index 10 Note 3 - Investment Securities The following represents the Company’s investment securities as of February 26, 2022 and May 29, 2021 (in thousands): February 26, 2022 Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value Municipal bonds $ 514 $ — $ 3 $ 511 Commercial paper 9,980 — 23 9,957 Corporate bonds 61,634 — 344 61,290 Certificates of deposits 1,268 — 12 1,256 Asset backed securities 8,205 — 94 8,111 Total current investment securities $ 81,601 $ — $ 476 $ 81,125 Mutual funds $ 2,967 $ — $ 53 $ 2,914 Total noncurrent investment securities $ 2,967 $ — $ 53 $ 2,914 May 29, 2021 Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value Municipal bonds $ 16,424 $ 56 $ — $ 16,480 Commercial paper 1,998 — — 1,998 Corporate bonds 80,092 608 — 80,700 Certificates of deposits 1,077 — 1 1,076 Asset backed securities 11,914 — 10 11,904 Total current investment securities $ 111,505 $ 664 $ 11 $ 112,158 Mutual funds $ 2,306 $ 1,810 $ — $ 4,116 Total noncurrent investment securities $ 2,306 $ 1,810 $ — $ 4,116 Available-for-sale Proceeds from sales and maturities of investment securities available-for-sale were $ 76.4 million and $ 85.2 million during the thirty-nine weeks ended February 26, 2022 and February 27, 2021, respectively. Gross realized gains for the thirty-nine weeks ended February 26, 2022 and February 27, 2021 were $ 181 thousand and $ 116 thousand, respectively. Gross realized losses for the thirty-nine weeks ended February 26, 2022 and February 27, 2021 were $ 67 thousand and $ 17 thousand, respectively. There were no allowances for credit losses at February 26, 2022 and May 29, 2021. Actual maturities may differ from contractual maturities as some borrowers have the right to call or prepay obligations with or without penalties. Contractual maturities of current investments at February 26, 2022 are as follows (in thousands): Estimated Fair Value Within one year $ 52,391 1-5 years 28,734 Total $ 81,125 Noncurrent Proceeds from sales and maturities of noncurrent investment securities were $ 4.9 million during the thirty-nine weeks ended February 26, 2022. Gross realized gains for the thirty-nine weeks ended February 26, 2022 were $ 2.2 million. There were no realized losses for the thirty-nine weeks ended February 26, 2022. There were no sales of noncurrent investment securities during the thirty-nine weeks ended February 27, 2021. Index 11 Note 4 - Fair Value Measurements The Company is required to categorize both financial and nonfinancial assets and liabilities based on the following fair value hierarchy. The fair value of an asset is the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable, and willing parties able to engage in the transaction. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor. • Level 1 - Quoted prices in active markets for identical assets or liabilities • Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, including: ◦ Quoted prices for similar assets or liabilities in active markets ◦ Quoted prices for identical or similar assets in non-active markets ◦ Inputs other than quoted prices that are observable for the asset or liability ◦ Inputs derived principally from or corroborated by other observable market data • Level 3 - Unobservable inputs for the asset or liability that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities The disclosures of fair value of certain financial assets and liabilities that are recorded at cost are as follows: Cash and cash equivalents, accounts receivable, and accounts payable: The carrying amount approximates fair value due to the short maturity of these instruments. Lease obligations: The carrying value of the Company’s lease obligations is at its present value which approximates fair value. Assets and Liabilities Measured at Fair Value on a Recurring Basis In accordance with the fair value hierarchy described above, the following table shows the fair value of financial assets and liabilities measured at fair value on a recurring basis as of February 26, 2022 and May 29, 2021 (in thousands): February 26, 2022 Level 1 Level 2 Level 3 Balance Assets Municipal bonds $ — $ 511 $ — $ 511 Commercial paper — 9,957 — 9,957 Corporate bonds — 61,290 — 61,290 Certificates of deposits — 1,256 — 1,256 Asset backed securities — 8,111 — 8,111 Mutual funds 2,914 — — 2,914 Total assets measured at fair value $ 2,914 $ 81,125 $ — $ 84,039 May 29, 2021 Level 1 Level 2 Level 3 Balance Assets Municipal bonds $ — $ 16,480 $ — $ 16,480 Commercial paper — 1,998 — 1,998 Corporate bonds — 80,700 — 80,700 Certificates of deposits — 1,076 — 1,076 Asset backed securities — 11,904 — 11,904 Mutual funds 4,116 — — 4,116 Total assets measured at fair value $ 4,116 $ 112,158 $ — $ 116,274 Investment securities – available-for-sale classified as Level 2 consist of securities with maturities of three months or longer when purchased. We classified these securities as current because amounts invested are readily available for current operations. Observable inputs for these securities are yields, credit risks, default rates, and volatility. Index 12 Note 5 - Inventories Inventories consisted of the following as of February 26, 2022 and May 29, 2021 (in thousands): February 26, 2022 May 29, 2021 Flocks, net of amortization $ 137,086 $ 123,860 Eggs and egg products 24,153 21,084 Feed and supplies 78,848 73,431 $ 240,087 $ 218,375 We grow and maintain flocks of layers (mature female chickens), pullets (female chickens, under 18 weeks of age), and breeders (male and female chickens used to produce fertile eggs to hatch for egg production flocks). Our total flock at February 26, 2022 consisted of approximately 9.4 million pullets and breeders and 42.7 million layers. Note 6 - Accrued Dividends Payable and Dividends per Common Share We accrue dividends at the end of each quarter according to the Company’s dividend policy adopted by its Board of Directors. The Company 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 GAAP 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 pays 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 most recent quarter for which a dividend was paid. For the third quarter of fiscal 2022, we will pay a cash dividend of approximately $ 0.125 per share to holders of our Common Stock and Class A Common Stock. The amount of the accrual is recorded in Accounts payable and accrued expenses in the Company’s Condensed Consolidated Balance Sheets. On our Condensed Consolidated Statements of Income, we determine dividends per common share in accordance with the computation in the following table (in thousands, except per share data): Thirteen Weeks Ended Thirty-nine Weeks Ended February 26, 2022 February 27, 2021 February 26, 2022 February 27, 2021 Net income attributable to Cal-Maine Foods, Inc. $ 39,517 $ 13,548 $ 22,664 $ 6,304 Cumulative losses to be recovered prior to payment of divided at beginning of period ( 21,097 ) ( 8,614 ) ( 4,244 ) ( 1,370 ) Net income available for dividend $ 18,420 $ 4,934 $ 18,420 $ 4,934 1/3 of net income attributable to Cal-Maine Foods, Inc. available for dividend 6,140 1,645 6,140 1,645 Common stock outstanding (shares) 44,140 44,056 Class A common stock outstanding (shares) 4,800 4,800 Total common stock outstanding (shares) 48,940 48,856 Dividends per common share* $ 0.125 $ 0.034 $ 0.125 $ 0.034 *Dividends per common share = 1/3 of Net income attributable to Cal-Maine Foods, Inc. available for dividend ÷ Total common stock outstanding (shares). Note 7 – Credit Facility On November 15, 2021, we entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with a five - year term. The Credit Agreement amended and restated the Company’s previously existing credit agreement dated July 10, 2018. The Credit Agreement provides for an increased senior secured revolving credit facility (the “Credit Facility” or “Revolver”), in an initial aggregate principal amount of up to $ 250 million, which includes a $ 15 million sublimit for the Index 13 issuance of standby letters of credit and a $ 15 million sublimit for swingline loans. The Credit Facility also includes an accordion feature permitting, with the consent of BMO Harris Bank N.A. (the “Administrative Agent”), an increase in the Credit Facility in the aggregate up to $ 200 million by adding one or more incremental senior secured term loans or increasing one or more times the revolving commitments under the Revolver. As of February 26, 2022, no amounts were borrowed under the Credit Facility and $ 4.1 million in standby letters of credit were issued under the Credit Facility. The interest rate in connection with loans made under the Credit Facility is based on, at the Company’s election, either the Eurodollar Rate plus the Applicable Margin or the Base Rate plus the Applicable Margin. The “Eurodollar Rate” means the reserve adjusted rate at which Eurodollar deposits in the London interbank market for an interest period of one , two , three , six or twelve months (as selected by the Company) are quoted. The “Base Rate” means a fluctuating rate per annum equal to the highest of (a) the federal funds rate plus 0.50 % per annum, (b) the prime rate of interest established by the Administrative Agent, and (c) the Eurodollar Rate for an interest period of one month plus 1 % per annum, subject to certain interest rate floors. The “Applicable Margin” means 0.00 % to 0.75 % per annum for Base Rate Loans and 1.00 % to 1.75 % per annum for Eurodollar Rate Loans, in each case depending upon the Total Funded Debt to Capitalization Ratio for the Company at the quarterly pricing date. The Company will pay a commitment fee on the unused portion of the Credit Facility payable quarterly from 0.15 % to 0.25 % in each case depending upon the Total Funded Debt to Capitalization Ratio for the Company at the quarterly pricing date. The Credit Agreement contains customary provisions regarding replacement of the Eurodollar Rate. The Credit Facility is guaranteed by all the current and future wholly-owned direct and indirect domestic subsidiaries of the Company (the “Guarantors”), and is secured by a first-priority perfected security interest in substantially all of the Company’s and the Guarantors’ accounts, payment intangibles, instruments (including promissory notes), chattel paper, inventory (including farm products) and deposit accounts maintained with the Administrative Agent. The Credit Agreement for the 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 maximum Total Funded Debt to Capitalization Ratio tested quarterly of no greater than 50 %; and (ii) a requirement to maintain Minimum Tangible Net Worth at all times of $ 700 Million plus 50 % of net income (if net income is positive) less permitted restricted payments for each fiscal quarter after November 27, 2021. Additionally, the Credit Agreement requires that Fred R. Adams Jr.’s 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. Further, under the terms of the Credit Agreement, payment of dividends under the Company's current dividend policy of one-third of the Company's net income computed in accordance with GAAP and payment of other dividends or repurchases by the Company of its capital stock is allowed, as long as after giving effect to such dividend payments or repurchases no default has occurred and is continuing and the sum of cash and cash equivalents of the Company and its subsidiaries plus availability under the Credit Facility equals at least $ 50 million. The Credit Agreement also includes customary events of default and customary remedies upon the occurrence of an event of default, including acceleration of the amounts due under the Credit Facility and foreclosure of the collateral securing the Credit Facility. At February 26, 2022, we were in compliance with the covenant requirements of the Credit Facility. Index 14 Note 8 - Equity The following reflects equity activity for the thirteen and thirty-nine weeks ended February 26, 2022 and February 27, 2021 (in thousands): Thirteen Weeks Ended February 26, 2022 Cal-Maine Foods, Inc. Stockholders Common Stock Class A Treasury Paid In Accum. Other Retained Noncontrolling Amount Amount Amount Capital Comp. Loss Earnings Interest Total Balance at November 27, 2021 $ 703 $ 48 $ ( 27,450 ) $ 66,019 $ ( 996 ) $ 959,124 $ ( 25 ) $ 997,423 Other comprehensive loss, net of tax — — — — ( 417 ) — — ( 417 ) Stock compensation plan transactions — — ( 989 ) 890 — — — ( 99 ) Dividends — — — — — ( 6,118 ) — ( 6,118 ) Net income (loss) — — — — — 39,517 ( 63 ) 39,454 Balance at February 26, 2022 $ 703 $ 48 $ ( 28,439 ) $ 66,909 $ ( 1,413 ) $ 992,523 $ ( 88 ) $ 1,030,243 Thirteen Weeks Ended February 27, 2021 Cal-Maine Foods, Inc. Stockholders Common Stock Accum. Class A Treasury Paid In Other Comp. Retained Amount Amount Amount Capital Income (Loss) Earnings Total Balance at November 28, 2020 $ 703 $ 48 $ ( 26,723 ) $ 62,206 $ 151 $ 968,325 $ 1,004,710 Other comprehensive loss, net of tax — — — — ( 286 ) — ( 286 ) Stock compensation plan transactions — — ( 826 ) 964 — — 138 Dividends — — — — — ( 1,661 ) ( 1,661 ) Net income — — — — — 13,548 13,548 Balance at February 27, 2021 $ 703 $ 48 $ ( 27,549 ) $ 63,170 $ ( 135 ) $ 980,212 $ 1,016,449 Thirty-nine Weeks Ended February 26, 2022 Cal-Maine Foods, Inc. Stockholders Common Stock Class A Treasury Paid In Accum. Other Retained Noncontrolling Amount Amount Amount Capital Comp. Loss Earnings Interest Total Balance at May 29, 2021 $ 703 $ 48 $ ( 27,433 ) $ 64,044 $ ( 558 ) $ 975,977 $ — $ 1,012,781 Other comprehensive loss, net of tax — — — — ( 855 ) — — ( 855 ) Stock compensation plan transactions — — ( 1,006 ) 2,865 — — — 1,859 Contributions — — — — — — 3 3 Dividends — — — — — ( 6,118 ) — ( 6,118 ) Net income (loss) — — — — — 22,664 ( 91 ) 22,573 Balance at February 26, 2022 $ 703 $ 48 $ ( 28,439 ) $ 66,909 $ ( 1,413 ) $ 992,523 $ ( 88 ) $ 1,030,243 Index 15 Thirty-nine Weeks Ended February 27, 2021 Cal-Maine Foods, Inc. Stockholders Common Stock Accum. Class A Treasury Paid In Other Comp. Retained Amount Amount Amount Capital Income (Loss) Earnings Total Balance at May 30, 2020 $ 703 $ 48 $ ( 26,674 ) $ 60,372 $ 79 $ 975,147 $ 1,009,675 Impact of ASC 326 — — — — — 422 422 Balance at May 31 2020 703 48 ( 26,674 ) 60,372 79 975,569 1,010,097 Other comprehensive loss, net of tax — — — — ( 214 ) — ( 214 ) Stock compensation plan transactions — — ( 875 ) 2,793 — — 1,918 Contributions — — — 5 — — 5 Dividends — — — — — ( 1,661 ) ( 1,661 ) Net income — — — — — 6,304 6,304 Balance at February 27, 2021 $ 703 $ 48 $ ( 27,549 ) $ 63,170 $ ( 135 ) $ 980,212 $ 1,016,449 Note 9 - Net Income per Common Share Basic net income per share is based on the weighted average Common Stock and Class A Common Stock outstanding. Diluted net income per share is based on weighted-average common shares outstanding during the relevant period adjusted for the dilutive effect of share-based awards. The following table provides a reconciliation of the numerators and denominators used to determine basic and diluted net income per common share (amounts in thousands, except per share data): Thirteen Weeks Ended Thirty-nine Weeks Ended February 26, 2022 February 27, 2021 February 26, 2022 February 27, 2021 Numerator Net income $ 39,454 $ 13,548 $ 22,573 $ 6,304 Less: Loss attributable to noncontrolling interest ( 63 ) — ( 91 ) — Net income attributable to Cal-Maine Foods, Inc. $ 39,517 $ 13,548 $ 22,664 $ 6,304 Denominator Weighted-average common shares outstanding, basic 48,886 48,530 48,888 48,511 Effect of dilutive restricted shares 150 129 147 138 Weighted-average common shares outstanding, diluted 49,036 48,659 49,035 48,649 Net income per common share attributable to Cal-Maine Foods, Inc. Basic $ 0.81 $ 0.28 $ 0.46 $ 0.13 Diluted $ 0.81 $ 0.28 $ 0.46 $ 0.13 Note 10 - Revenue Recognition Satisfaction of Performance Obligation Most of the Company’s revenue is derived from contracts with customers based on the customer placing an order for products. Pricing for the most part is determined when the Company and the customer agree upon the specific order, which establishes the contract for that order. Index 16 Revenues are recognized in an amount that reflects the net consideration we expect to receive in exchange for the goods. Our shell eggs are sold at prices related to independently quoted wholesale market prices, negotiated prices or formulas related to our costs of production. The Company’s sales predominantly contain a single performance obligation. We recognize revenue upon satisfaction of the performance obligation with the customer, which typically occurs within days of the Company and the customer agreeing upon the order. Returns and Refunds Some of our contracts include a guaranteed sale clause, pursuant to which we credit the customer’s account for product that the customer is unable to sell before expiration. The Company records an estimate of returns and refunds by using historical return data and comparing to current period sales and accounts receivable. The allowance is recorded as a reduction in sales with a corresponding reduction in trade accounts receivable. Sales Incentives Provided to Customers 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.’’ Disaggregation of Revenue The following table provides revenue disaggregated by product category (in thousands): Thirteen Weeks Ended Thirty-nine Weeks Ended February 26, 2022 February 27, 2021 February 26, 2022 February 27, 2021 Conventional shell egg sales $ 280,633 $ 203,189 $ 685,678 $ 560,297 Specialty shell egg sales 182,945 145,210 462,319 408,537 Egg products 12,749 9,098 33,516 25,736 Other 1,158 1,583 2,682 4,619 $ 477,485 $ 359,080 $ 1,184,195 $ 999,189 Contract Costs The Company can incur costs to obtain or fulfill a contract with a customer. If the amortization period of these costs is less than one year, they are expensed as incurred. When the amortization period is greater than one year, a contract asset is recognized and is amortized over the contract life as a reduction in net sales. As of February 26, 2022 and February 27, 2021, the balance for contract assets is immaterial. Contract Balances The Company receives payment from customers based on specified terms that are generally less than 30 days from delivery. There are rarely contract assets or liabilities related to performance under the contract. Index 17 Note 11 - Leases Expenses related to operating leases, amortization of finance leases, right-of-use assets, and finance lease interest are included in Cost of sales, Selling general and administrative expense, and Interest income, net in the Condensed Consolidated Statements of Income. The Company’s lease cost consists of the following (in thousands): Thirteen Weeks Ended Thirty-nine Weeks Ended February 26, 2022 February 26, 2022 Operating lease cost $ 200 $ 625 Finance lease cost Amortization of right-of-use asset $ 44 $ 132 Interest on lease obligations $ 6 $ 20 Short term lease cost $ 1,086 $ 3,221 Future minimum lease payments under non-cancelable leases are as follows (in thousands): As of February 26, 2022 Operating Leases Finance Leases Remainder fiscal 2022 $ 180 $ 60 2023 539 240 2024 380 217 2025 130 — 2026 26 — 2027 5 — Total 1,260 517 Less imputed interest ( 92 ) ( 24 ) Total $ 1,168 $ 493 The weighted-average remaining lease term and discount rate for lease liabilities included in our Condensed Consolidated Balance Sheet are as follows: As of February 26, 2022 Operating Leases Finance Leases Weighted-average remaining lease term (years) 2.4 1.8 Weighted-average discount rate 5.9 % 4.9 % Note 12 - Stock Based Compensation Total stock-based compensation expense was $ 3.0 million and $ 2.8 million for the thirty-nine weeks ended February 26, 2022 and February 27, 2021, respectively. Unrecognized compensation expense as a result of non-vested shares of restricted stock outstanding under the Amended and Restated 2012 Omnibus Long-Term Incentive Plan at February 26, 2022 of $ 8.1 million will be recorded over a weighted average period of 2.3 years. Refer to Part II Item 8, Notes to Consolidated Financial Statements and Supplementary Data, Note 16: Stock Compensation Plans in our 2021 Annual Report for further information on our stock compensation plans. Index 18 The Company’s restricted share activity for the thirty-nine weeks ended February 26, 2022 follows: Number of Shares Weighted Average Grant Date Fair Value Outstanding, May 29, 2021 302,147 $ 39.37 Granted 113,142 41.13 Vested ( 90,778 ) 42.53 Forfeited ( 3,932 ) 37.81 Outstanding, February 26, 2022 320,579 $ 39.12 Note 13 - Commitments and Contingencies Financial Instruments The Company maintained standby letters of credit (“LOCs”) totaling $ 4.1 million at February 26, 2022, which were issued under the Company's Credit Facility. The outstanding LOCs are for the benefit of certain insurance companies and are not recorded as a liability on the consolidated balance sheets. LEGAL PROCEEDINGS State of Texas v. Cal-Maine Foods, Inc. d/b/a Wharton; and Wharton County Foods, LLC On April 23, 2020, the Company and its subsidiary Wharton County Foods, LLC (“WCF”) were named as defendants in State of Texas v. Cal-Maine Foods, Inc. d/b/a Wharton; and Wharton County Foods, LLC, Cause No. 2020-25427, in the District Court of Harris County, Texas. The State of Texas (the “State”) asserted claims based on the Company’s and WCF’s alleged violation of the Texas Deceptive Trade Practices—Consumer Protection Act, Tex. Bus. & Com. Code §§ 17.41-17.63 (“DTPA”). The State claimed that the Company and WCF offered shell eggs at excessive or exorbitant prices during the COVID-19 state of emergency and made misleading statements about shell egg prices. The State sought temporary and permanent injunctions against the Company and WCF to prevent further alleged violations of the DTPA, along with over $ 100,000 in damages. On August 13, 2020, the court granted the defendants’ motion to dismiss the State’s original petition with prejudice. On September 11, 2020, the State filed a notice of appeal, which was assigned to the Texas Court of Appeals for the First District. The State filed its opening brief on December 7, 2020. The Company and WCF filed their response on February 8, 2021. On February 11, 2022, the Texas Court of Appeals heard oral argument but has not issued a ruling. Management believes the risk of material loss related to this matter to be remote. Bell et al. v. Cal-Maine Foods et al. On April 30, 2020, the Company was named as one of several defendants in Bell et al. v. Cal-Maine Foods et al., Case No. 1:20-cv-461, in the Western District of Texas, Austin Division. The defendants include numerous grocery stores, retailers, producers, and farms. Plaintiffs assert that defendants violated the DTPA by allegedly demanding exorbitant or excessive prices for eggs during the COVID-19 state of emergency. Plaintiffs request certification of a class of all consumers who purchased eggs in Texas sold, distributed, produced, or handled by any of the defendants during the COVID-19 state of emergency. Plaintiffs seek to enjoin the Company and other defendants from selling eggs at a price more than 10% greater than the price of eggs prior to the declaration of the state of emergency and damages in the amount of $ 10,000 per violation, or $ 250,000 for each violation impacting anyone over 65 years old. On December 1, 2020, the Company and certain other defendants filed a motion to dismiss the plaintiffs’ amended class action complaint. The plaintiffs subsequently filed a motion to strike, and the motion to dismiss and related proceedings were referred to a United States magistrate judge. On July 14, 2021, the magistrate judge issued a report and recommendation to the court that the defendants’ motion to dismiss be granted and the case be dismissed without prejudice for lack of subject matter jurisdiction. On September 20, 2021, the court adopted the magistrate’s report and recommendation in its entirety and granted defendants’ motion to dismiss plaintiffs’ first amended class action complaint; thereafter, the court entered a final judgment in favor of the Company and certain other defendants dismissing the case without prejudice. On October 18, 2021, plaintiffs filed a motion to alter or amend the final judgement and allow a filing of a second amended complaint. The Company responded on November 1, 2021. The court has not ruled on the plaintiffs’ motion. Index 19 Kraft Foods Global, Inc. et al. v. United Egg Producers, Inc. et al. As previously reported, 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 Company settled all of these 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). These remaining plaintiffs are Kraft Food Global, Inc., General Mills, Inc., and Nestle USA, Inc. (the “Egg Products Plaintiffs”) and The Kellogg Company. On September 13, 2019, the case with the Egg Products Plaintiffs was remanded from a multi-district litigation proceeding in the United States District Court for the Eastern District of Pennsylvania, In re Processed Egg Products Antitrust Litigation, MDL No. 2002, to the United States District Court for the Northern District of Illinois, Kraft Foods Global, Inc. et al. v. United Egg Producers, Inc. et al., Case No. 1:11-cv-8808, for trial. The Egg Products Plaintiffs allege that the Company and other defendants violated Section 1 of the Sherman Act, 15. U.S.C. § 1, by agreeing to limit the production of eggs and thereby illegally to raise the prices that plaintiffs paid for processed egg products. In particular, the Egg Products Plaintiffs are attacking certain features of the United Egg Producers animal-welfare guidelines and program used by the Company and many other egg producers. The Egg Products Plaintiffs seek to enjoin the Company and other defendants from engaging in antitrust violations and seek treble money damages. The parties filed a joint status report on May 18, 2020. On August 4, 2021, by docket entry, the court instructed the parties to jointly submit a second status report to the court that included a proposed schedule for preparing a final pretrial order. On August 25, 2021, the parties filed a joint status report, and on August 26, 2021, the court, by docket entry, informed the parties that the need to discuss issues was no longer necessary and that a scheduled August 30, 2021, status hearing was stricken. No trial schedule has yet been entered by the court. In addition, on October 24, 2019, the Company entered into a confidential settlement agreement with The Kellogg Company dismissing all claims against the Company for an amount that did not have a material impact on the Company’s financial condition or results of operations. On November 11, 2019, a stipulation for dismissal was filed with the court, but the court has not yet entered a judgment on the filing. The Company intends to continue to defend the remaining case with the Egg Products Plaintiffs as vigorously as possible based on defenses which the Company believes are meritorious and provable. Adjustments, if any, which might result from the resolution of this remaining matter with the Egg Products Plaintiffs have not been reflected in the financial statements. While management believes that there is still a reasonable possibility of a material adverse outcome from the case with the Egg Products Plaintiffs, at the present time, it is not possible to estimate the amount of monetary exposure, if any, to the Company due to a range of factors, including the following, among others: the matter is in the early stages of preparing for trial following remand; any trial will be before a different judge and jury in a different court than prior related cases; there are significant factual issues to be resolved; and there are requests for damages other than compensatory damages (i.e., injunction and treble money damages). 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 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, 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. Index 20 Note 14 - Related Party Transaction On August 24, 2020, Mrs. Jean Reed Adams, the wife of the Company’s late founder Fred R. Adams, Jr., and the Fred R. Adams, Jr. Daughters’ Trust, dated July 20, 2018 (the “Daughters’ Trust”), of which the daughters of Mr. Adams are beneficiaries (together, the “Selling Stockholders”), completed a registered secondary public offering of 6,900,000 shares of Common Stock held by them, pursuant to a previously disclosed Agreement Regarding Common Stock (the “Agreement”) filed as an exhibit to our 2021 Annual Report. Mrs. Adams and the Daughters’ Trust advised the Company that they were conducting the offering in order to pay estate taxes related to the settlement of Mr. Adam’s estate and to obtain liquidity. The public offering was made pursuant to the Company’s effective shelf registration statement on Form S-3 (File No. 333-227742), including the Prospectus contained therein dated October 9, 2018, and a related Prospectus Supplement dated August 19, 2020, each of which is on file with the Securities and Exchange Commission. The public offering involved only the sale of shares of Common Stock that were already outstanding, and thus the Company did not issue any new shares or raise any additional capital in the offering. The expenses of the offering (not including the underwriting discount and legal fees and expenses of legal counsel for the Selling Stockholders, which were paid by the Selling Stockholders) paid by the Company were $ 1.1 million. Pursuant to the Agreement, the Selling Stockholders reimbursed the Company $ 551 thousand. Index 21