CAL-MAINE FOODS INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Cal-Maine Foods, Inc. and Subsidiaries Ridgeland, Mississippi Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Cal-Maine Foods, Inc. and Subsidiaries as of June 3, 2023 and May 28, 2022, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended June 3, 2023, and the related consolidated notes and schedule listed in the Index at Items 15(a)(1) and 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Cal-Maine Foods, Inc. and Subsidiaries as of June 3, 2023 and May 28, 2022, and the results of their operations and their cash flows for each of the three years in the period ended June 3, 2023, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Cal-Maine Foods, Inc. and Subsidiaries’ internal control over financial reporting as of June 3, 2023, based on the criteria established in 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 25, 2023 expressed an unqualified opinion. Basis for Opinion These consolidated financial statements are the responsibility of the entities’ management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Cal-Maine Foods, Inc. and Subsidiaries in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the Audit Committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Contingent Liabilities – Litigation and Claims – Refer to Note 16 in the Consolidated Financial Statements Critical Audit Matter Description Cal-Maine Foods, Inc. and Subsidiaries record liabilities for legal proceedings and claims in those instances where they can reasonably estimate the amount of the loss and when the liability is probable. Where the reasonable estimate of the probable loss is a range, Cal-Maine Foods, Inc. and Subsidiaries record the most likely estimate of the loss, or the low end of the range if there is no one best estimate. Cal-Maine Foods, Inc. and Subsidiaries either disclose the amount of a possible loss or range of loss 36 in excess of established accruals if estimable, or states that such an estimate cannot be made. Cal-Maine Foods, Inc. and Subsidiaries disclose significant legal proceedings and claims even where liability is not probable or the amount of the liability is not estimable, or both, if Cal-Maine Foods, Inc. and Subsidiaries believe there is at least a reasonable possibility that a loss may be incurred. We identified litigation and claims as a critical audit matter because of the challenges auditing management’s judgments applied in determining the likelihood of loss related to the resolution of such claims. Specifically, auditing management’s determination of whether any contingent loss arising from the related litigation and claims is probable, reasonably possible, or remote, and the related disclosures, is subjective and requires significant judgment due to the sensitivity of the issue. How the Critical Audit Matter was addressed during the Audit Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of the controls relating to the Cal-Maine Foods, Inc. and Subsidiaries’ evaluation of the liability related to legal proceedings and claims, including controls over determining the likelihood of a loss and whether the amount of loss can be reasonably estimated, as well as financial statement disclosures over the legal proceedings and claims. These procedures also included obtaining and evaluating the letters of audit inquiry with external legal counsel, evaluating the reasonableness of Cal-Maine Foods, Inc. and Subsidiaries’ assessment regarding whether an unfavorable outcome is reasonably possible or probable, and reasonably estimable, evaluating the sufficiency of Cal-Maine Foods, Inc. and Subsidiaries’ disclosures related to legal proceedings and claims and evaluating the completeness and accuracy of Cal-Maine Foods, Inc. and Subsidiaries’ legal contingencies. /s/ Frost, PLLC We have served as the Company’s auditor since 2007. Little Rock, Arkansas July 25, 2023 37 Cal-Maine Foods, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except for par value amounts) June 3, 2023 May 28, 2022 Assets Current assets: Cash and cash equivalents $ 292,824 $ 59,084 Investment securities available-for-sale 355,090 115,429 Receivables: Trade receivables, net 110,980 169,109 Income tax receivable 66,966 42,147 Other 9,267 8,148 Total receivables, net 187,213 219,404 Inventories, net 284,418 263,316 Prepaid expenses and other current assets 5,380 4,286 Total current assets 1,124,925 661,519 Property, plant & equipment, net 744,540 677,796 Investments in unconsolidated entities 14,449 15,530 Goodwill 44,006 44,006 Intangible assets, net 15,897 18,131 Other long-term assets 10,708 10,507 Total assets $ 1,954,525 $ 1,427,489 Liabilities and stockholders’ equity Current liabilities: Trade accounts payable $ 82,590 $ 82,049 Dividends payable 37,130 36,656 Accrued wages and benefits 38,733 26,059 Income tax payable 8,288 25,687 Accrued expenses and other liabilities 15,990 14,223 Total current liabilities 182,731 184,674 Other noncurrent liabilities 9,999 10,274 Deferred income taxes 152,212 128,196 Total liabilities 344,942 323,144 Commitments and contingencies - see Note 16 — — 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 72,112 67,989 Retained earnings 1,571,112 1,065,854 Accumulated other comprehensive loss, net of tax ( 2,886 ) ( 1,596 ) Common stock in treasury, at cost – 26,077 and 26,121 shares in 2023 and 2022, respectively ( 30,008 ) ( 28,447 ) Total Cal-Maine Foods, Inc. stockholders’ equity 1,611,081 1,104,551 Noncontrolling interest in consolidated equity ( 1,498 ) ( 206 ) Total stockholders’ equity 1,609,583 1,104,345 Total liabilities and stockholders’ equity $ 1,954,525 $ 1,427,489 See Notes to Consolidated Financial Statements. 38 Cal-Maine Foods, Inc. and Subsidiaries Consolidated Statements of Income (in thousands, except per share amounts) Fiscal years ended June 3, 2023 May 28, 2022 May 29, 2021 53 weeks 52 weeks 52 weeks Net sales $ 3,146,217 $ 1,777,159 $ 1,348,987 Cost of sales 1,949,760 1,440,100 1,188,326 Gross profit 1,196,457 337,059 160,661 Selling, general and administrative 232,207 198,631 183,943 Gain on insurance recoveries ( 3,345 ) ( 5,492 ) — (Gain) loss on disposal of fixed assets ( 131 ) 383 2,982 Operating income (loss) 967,726 143,537 ( 26,264 ) Other income (expense): Interest expense ( 583 ) ( 403 ) ( 213 ) Interest income 18,553 988 2,828 Patronage dividends 10,239 10,130 9,004 Equity in income of unconsolidated entities 746 1,943 622 Other, net 1,869 9,820 4,074 Total other income 30,824 22,478 16,315 Income (loss) before income taxes 998,550 166,015 ( 9,949 ) Income tax expense (benefit) 241,818 33,574 ( 12,009 ) Net income 756,732 132,441 2,060 Less: Net loss attributable to noncontrolling interest ( 1,292 ) ( 209 ) — Net income attributable to Cal-Maine Foods, Inc. $ 758,024 $ 132,650 $ 2,060 Net income per share attributable to Cal-Maine Foods, Inc.: Basic $ 15.58 $ 2.73 $ 0.04 Diluted $ 15.52 $ 2.72 $ 0.04 Weighted average shares outstanding: Basic 48,648 48,581 48,522 Diluted 48,834 48,734 48,656 See Notes to Consolidated Financial Statements. 39 Cal-Maine Foods, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (in thousands) Fiscal years ended June 3, 2023 May 28, 2022 May 29, 2021 Net income $ 756,732 $ 132,441 $ 2,060 Other comprehensive loss, before tax: Unrealized holding loss available-for-sale securities, net of reclassification adjustments ( 1,714 ) ( 1,398 ) ( 736 ) Increase in accumulated post-retirement benefits obligation, net of reclassification adjustments ( 27 ) ( 9 ) ( 137 ) Other comprehensive loss, before tax ( 1,741 ) ( 1,407 ) ( 873 ) Income tax benefit related to items of other comprehensive loss ( 451 ) ( 369 ) ( 236 ) Other comprehensive loss, net of tax ( 1,290 ) ( 1,038 ) ( 637 ) Comprehensive income 755,442 131,403 1,423 Less: comprehensive loss attributable to the noncontrolling interest ( 1,292 ) ( 209 ) — Comprehensive income attributable to Cal-Maine Foods, Inc. $ 756,734 $ 131,612 $ 1,423 See Notes to Consolidated Financial Statements. 40 Cal-Maine Foods, Inc. and Subsidiaries Consolidated Statements of Stockholders’ Equity (in thousands) Accum. Other Common Stock Comp. Shares Amount Class A Shares Class A Amount Treasury Shares Treasury Amount Paid In Capital Retained Earnings Income (loss) Noncontrolling Interest Total Balance at May 31, 2020 70,261 $ 703 4,800 $ 48 26,287 $ ( 26,674 ) $ 60,372 $ 975,569 $ 79 $ — 1,010,097 Stock compensation plan transactions — — — — ( 85 ) ( 759 ) 3,667 — — — 2,908 Dividends ($ 0.034 per share) Common — — — — — — — ( 1,489 ) — — ( 1,489 ) Class A common — — — — — — — ( 163 ) — — ( 163 ) Contributions — — — — — — 5 — — — 5 Net income — — — — — — — 2,060 — — 2,060 Other comprehensive loss, net of tax — — — — — — — — ( 637 ) — ( 637 ) Balance at May 29, 2021 70,261 703 4,800 — 48 26,202 ( 27,433 ) 64,044 975,977 ( 558 ) — 1,012,781 Stock compensation plan transactions — — — — ( 81 ) ( 1,014 ) 3,945 — — 2,931 Dividends ($ 0.874 per share) Common — — — — — — — ( 38,578 ) — — ( 38,578 ) Class A common — — — — — — — ( 4,195 ) — — ( 4,195 ) Contributions — — — — — — — — — 3 3 Net income (loss) — — — — — — — 132,650 — ( 209 ) 132,441 Other comprehensive loss, net of tax — — — — — — — — ( 1,038 ) ( 1,038 ) Balance at May 28, 2022 70,261 703 4,800 48 26,121 ( 28,447 ) 67,989 1,065,854 ( 1,596 ) ( 206 ) 1,104,345 Stock compensation plan transactions — — — — ( 44 ) ( 1,561 ) 4,123 — — — 2,562 Dividends ($ 5.161 per share) Common — — — — — — — ( 227,993 ) — — ( 227,993 ) Class A common — — — — — — — ( 24,773 ) — — ( 24,773 ) Net income (loss) — — — — — — — 758,024 — ( 1,292 ) 756,732 Other comprehensive loss, net of tax — — — — — — — — ( 1,290 ) — ( 1,290 ) Balance at June 3, 2023 70,261 $ 703 4,800 $ 48 26,077 $ ( 30,008 ) $ 72,112 $ 1,571,112 $ ( 2,886 ) $ ( 1,498 ) $ 1,609,583 See Notes to Consolidated Financial Statements. 41 Cal-Maine Foods, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) Fiscal year ended June 3, 2023 May 28, 2022 May 29, 2021 Cash flows from operating activities: Net income $ 756,732 $ 132,441 $ 2,060 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 72,234 68,395 59,477 Deferred income taxes 24,467 5,676 22,351 Equity in income of affiliates ( 746 ) ( 1,943 ) ( 622 ) Gain on insurance recoveries ( 3,345 ) ( 5,492 ) — Net proceeds from insurance settlement - business interruption 3,345 — — (Gain) loss on disposal of property, plant and equipment ( 131 ) 383 2,982 Stock compensation expense, net of amounts paid 4,205 4,063 3,778 Unrealized (gain) loss on investments 17 ( 745 ) 1,810 (Gain) loss on sales of investments 60 ( 2,208 ) ( 22 ) Purchases of equity securities ( 85 ) ( 356 ) ( 334 ) Sales of equity securities 1,739 4,939 55 Amortization (accretion) of investments ( 4,380 ) 977 890 Impairment of investment in affiliate 2,000 — — Gain on change in fair value of investment in affiliates — ( 4,545 ) — Other 35 ( 109 ) ( 231 ) Change in operating assets and liabilities, net of effects from acquisitions: Increase (decrease) in receivables and other assets 30,816 ( 93,897 ) ( 33,487 ) Increase in inventories ( 21,102 ) ( 36,152 ) ( 31,159 ) Increase (decrease) in accounts payable, accrued expenses and other liabilities ( 2,851 ) 54,782 ( 1,412 ) Net cash provided by operating activities 863,010 126,209 26,136 Cash flows from investing activities: Purchases of investments ( 530,781 ) ( 98,243 ) ( 88,283 ) Sales of investments 291,832 92,703 129,108 Acquisition of business, net of cash acquired — ( 44,823 ) — Investment in unconsolidated entities ( 1,673 ) ( 3,000 ) — Distributions from unconsolidated entities 1,500 400 6,663 Purchases of property, plant and equipment ( 136,569 ) ( 72,399 ) ( 95,069 ) Net proceeds from insurance settlement - property, plant and equipment — 7,655 — Net proceeds from disposal of property, plant and equipment 580 686 3,390 Net cash used in investing activities ( 375,111 ) ( 117,021 ) ( 44,191 ) Cash flows from financing activities: Principal payments on finance lease ( 224 ) ( 215 ) ( 205 ) Purchase of common stock by treasury ( 1,643 ) ( 1,127 ) ( 871 ) Payments of dividends ( 252,292 ) ( 6,117 ) ( 1,652 ) Contributions — 3 5 Net cash used in financing activities ( 254,159 ) ( 7,456 ) ( 2,723 ) Increase (decrease) in cash and cash equivalents 233,740 1,732 ( 20,778 ) Cash and cash equivalents at beginning of year 59,084 57,352 78,130 Cash and cash equivalents at end of year $ 292,824 $ 59,084 $ 57,352 Supplemental information: Cash paid for operating leases $ 648 $ 805 $ 929 Income taxes paid $ 258,247 $ 1,747 $ 995 Interest paid $ 561 $ 379 $ 508 See Notes to Consolidated Financial Statements. 42 Cal-Maine Foods, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 1 - Summary of Significant Accounting Policies Nature of Operations 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, including conventional, cage-free, organic, brown, free -range, pasture-raised and nutritionally-enhanced eggs. The Company, which is headquartered in Ridgeland, Mississippi, is the largest producer and distributor of fresh shell eggs in the United States and sells the majority of its shell eggs in states across the southwestern, southeastern, mid-western and mid-Atlantic regions of the United States. Principles of Consolidation The consolidated financial statements include the accounts of all wholly-owned subsidiaries and of majority-owned subsidiaries over which we exercise control. All significant intercompany transactions and accounts have been eliminated in consolidation. Fiscal Year The Company’s fiscal year-end is on the Saturday closest to May 31. The fiscal year ended June 3, 2023 , included 53 weeks and the fiscal years ended May 28, 2022 and May 29, 2021 included 52 weeks. Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America 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. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. We maintain bank accounts that are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company routinely maintains cash balances with certain financial institutions in excess of federally insured amounts. The Company has not experienced any loss in such accounts. The Company manages this risk through maintaining cash deposits and other highly liquid investments in high quality financial institutions. We primarily utilize a cash management system with a series of separate accounts consisting of lockbox accounts for receiving cash, concentration accounts to which funds are moved, and zero-balance disbursement accounts for funding accounts payable. Checks issued, but not presented to the banks for payment, may result in negative book cash balances, which are included in accounts payable. Investment Securities The Company has determined that its debt securities are available-for-sale investments. We classify these securities as current because the amounts invested are available for current operations. Available -for-sale securities are carried at fair value, based on quoted market prices as of the balance sheet date, with unrealized gains and losses recorded in other comprehensive income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity and is recorded in interest income. 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 allowance for credit losses, limited to the amount that fair value was less than the amortized cost basis. Investments in mutual funds are recorded at fair value and are classified as “Other long-term assets” in the Company’s Consolidated Balance Sheets. Unrealized gains and losses for equity securities are recorded in other income (expenses) as Other, net in the Company’s Consolidated Statements of Income. 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 Consolidated Statements of Income. Interest and dividends on securities classified as available-for-sale are recorded in interest income. 43 Trade Receivables Trade receivables are stated at their carrying values, which include a reserve for credit losses. At June 3, 2023 and May 28, 2022, reserves for credit losses were $ 579 thousand and $ 775 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. At June 3, 2023 and May 28, 2022, one customer accounted for approximately 30.1 % and 27.9 % of the Company’s trade accounts receivable, respectively. 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. The cost associated with flocks, consisting principally of chicks, feed, labor, contractor payments and overhead costs, are accumulated during a growing period of approximately 22 weeks. Flock costs are amortized to cost of sales over the productive lives of the flocks, generally one to two years . Flock mortality is charged to cost of sales as incurred. The Company does not disclose the gross cost and accumulated amortization with respect to its flock inventories since this information is not utilized by management in the operation of the Company. Property, Plant and Equipment Property, plant and equipment are stated at cost. 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. Repairs and maintenance are expensed as incurred. Expenditures that increase the value or productive capacity of assets are capitalized. When property, plant, 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. The Company capitalizes interest cost incurred on funds used to construct property, plant, and equipment as part of the asset to which it relates and amortizes such cost over the asset’s estimated useful life. When certain events or changes in operating conditions occur, asset lives may be adjusted and an impairment assessment may be performed on the recoverability of the carrying amounts. Investments in Unconsolidated Entities The equity method of accounting is used when the Company can exert significant influence over an entity, but does not control its financial and operating decisions. Under the equity method, original investments are recorded at cost and adjusted by the Company’s share of undistributed earnings or losses of these entities. Equity investments without readily determinable fair values, when the Company does not have the ability to exercise significant influence over the investee, are recorded at cost, less impairment, plus or minus observable price changes. The Company is a member of Eggland’s Best, Inc. and ProEgg, Inc., which are cooperatives. These investments are recorded at cost, plus or minus any allocated equities and retains. Goodwill Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired. 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. During the fourth quarter of 2023, we elected to change the date of our annual impairment assessment from year- end to the first day of the fourth quarter. The change was made to more closely align the impairment assessment date with our annual planning and forecasting process. The change in impairment assessment date did not have any impact on goodwill or the impairment of goodwill. The change has been applied prospectively and would not have an impact on a retrospective basis. 44 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 or the contract has expired. When certain events or changes in operating conditions occur, asset lives may be adjusted and an impairment assessment may be performed on the recoverability of the carrying amounts. Accrued Self Insurance We use a combination of insurance and self-insurance mechanisms to provide coverage for the potential liabilities for health and welfare, workers’ compensation, auto liability and general liability risks. Liabilities associated with our risks retained are estimated, in part, by considering claims experience, demographic factors, severity factors and other actuarial assumptions. Dividend Payable 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. Treasury Stock Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. The grant of restricted stock through the Company’s share-based compensation plans is funded through the issuance of treasury stock. Gains and losses on the subsequent reissuance of shares in accordance with the Company’s share- based compensation plans are credited or charged to paid-in capital in excess of par value using the average-cost method. 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 13 – Revenue Recognition 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 Income. Sales revenue reported in the accompanying Consolidated Statements of Income 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. Advertising Costs The Company expensed advertising costs as incurred of $ 3.4 million, $ 12.6 million, and $ 11.7 million in fiscal 2023, 2022, and 2021, respectively. Income Taxes Income taxes are accounted for using the liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s policy with respect to evaluating uncertain tax positions is based upon whether management believes it is more likely than not the uncertain tax positions will be sustained upon review by the taxing authorities. The tax positions must meet the more-likely-than-not recognition threshold with consideration given to the amounts and probabilities of the outcomes that could be realized upon settlement using the facts, circumstances and information at the reporting date. The Company will reflect only the portion of the tax benefit that will be sustained upon resolution of the position and applicable 45 interest on the portion of the tax benefit not recognized. The Company initially and subsequently measures the largest amount of tax benefit that is greater than 50% likely to be realized upon settlement with a taxing authority that has full knowledge of all relevant information. The Company records interest and penalties on uncertain tax positions as a component of income tax expense. Based upon management’s assessment, there are no uncertain tax positions expected to have a material impact on the Company’s consolidated financial statements. Stock Based Compensation The Company recognizes all share-based payments to employees and directors, including grants of employee stock options, restricted stock and performance-based shares, in the Consolidated Statements of Income based on their fair values. The benefits of tax deductions in excess of recognized compensation cost are reported as a financing cash flow. See Note 14 – Stock Compensation Plans for more information. Business Combinations The Company applies the acquisition method of accounting, which requires that once control is obtained, all the assets acquired and liabilities assumed, including amounts attributable to noncontrolling interests, are recorded at their respective fair values at the date of acquisition. We determine the fair values of identifiable assets and liabilities internally, which requires estimates and the use of various valuation techniques. When a market value is not readily available, our internal valuation methodology considers the remaining estimated life of the assets acquired and what management believes is the market value for those assets. We typically use the income method approach for intangible assets acquired in a business combination. Significant estimates in valuing certain intangible assets include, but are not limited to, the amount and timing of future cash flows, growth rates, discount rates and useful lives. The excess of the purchase price over fair values of identifiable assets and liabilities is recorded as goodwill. Loss Contingencies Certain conditions may exist as of the date the financial statements are issued that may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed. The Company expenses the costs of litigation as they are incurred. New Accounting Pronouncements and Policies No new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on our Consolidated Financial Statements. 46 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. 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 $ 955,000 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. 47 Note 3 - Investment Securities The following presents the Company’s investment securities as of June 3, 2023 and May 28, 2022 (in thousands): June 3, 2023 Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value Municipal bonds $ 16,571 $ — $ 275 $ 16,296 Commercial paper 56,486 — 77 56,409 Corporate bonds 139,979 — 1,402 138,577 Certificates of deposits 675 — — 675 US government and agency obligations 101,240 — 471 100,769 Asset backed securities 13,459 — 151 13,308 Treasury bills 29,069 — 13 29,056 Total current investment securities $ 357,479 $ — $ 2,389 $ 355,090 Mutual funds $ 2,172 $ — $ 91 $ 2,081 Total noncurrent investment securities $ 2,172 $ — $ 91 $ 2,081 May 28, 2022 Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value Municipal bonds $ 10,136 $ — $ 32 $ 10,104 Commercial paper 14,940 — 72 14,868 Corporate bonds 74,167 — 483 73,684 Certificates of deposits 1,263 — 18 1,245 US government and agency obligations 2,205 4 — 2,209 Asset backed securities 13,456 — 137 13,319 Total current investment securities $ 116,167 $ 4 $ 742 $ 115,429 Mutual funds $ 3,826 $ — $ 74 $ 3,752 Total noncurrent investment securities $ 3,826 $ — $ 74 $ 3,752 Available-for-sale Proceeds from the sales and maturities of available-for-sale securities were $ 291.8 million, $ 92.7 million, and $ 129.1 million during fiscal 2023, 2022, and 2021, respectively. Gross realized gains for fiscal 2023, 2022, and 2021 were $ 51 thousand, $ 181 thousand, and $ 456 thousand, respectively. Gross realized losses for fiscal 2023, 2022, and 2021 were $ 87 thousand, $ 76 thousand, and $ 19 thousand, respectively. There was no allowance for credit losses at June 3, 2023 and May 28, 2022. Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Contractual maturities of investment securities at June 3, 2023 are as follows (in thousands): Estimated Fair Value Within one year $ 269,830 1-5 years 85,260 Total $ 355,090 Noncurrent Proceeds from sales and maturities of noncurrent investment securities were $ 1.7 million, $ 4.9 million, and $ 54 thousand, during fiscal 2023, 2022 and 2021, respectively. Gross realized gains on those sales and maturities during fiscal 2023, 2022 and 2021 were $ 6 thousand, $ 2.2 million and $ 611 thousand, respectively. Gross realized losses during fiscal 2023 were $ 66 thousand. There were no realized losses for fiscal 2022 and 2021. 48 Note 4 - Fair Value Measures 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: o Quoted prices for similar assets or liabilities in active markets o Quoted prices for identical or similar assets in non-active markets o Inputs other than quoted prices that are observable for the asset or liability o Inputs derived principally from or corroborated by other observable market data ● Level 3 - Unobservable inputs for the asset or liability supported by little or no market activity and are significant to the fair value of the assets or liabilities The disclosure of fair value of certain financial assets and liabilities 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. 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 our financial assets and liabilities that are required to be measured at fair value on a recurring basis as of June 3, 2023 and May 28, 2022 (in thousands): June 3, 2023 Level 1 Level 2 Level 3 Balance Assets Municipal bonds $ — $ 16,296 $ — $ 16,296 Commercial paper — 56,409 — 56,409 Corporate bonds — 138,577 — 138,577 Certificates of deposits — 675 — 675 US government and agency obligations — 100,769 — 100,769 Asset backed securities — 13,308 — 13,308 Treasury bills — 29,056 — 29,056 Mutual funds 2,081 — — 2,081 Total assets measured at fair value $ 2,081 $ 355,090 $ — $ 357,171 May 28, 2022 Level 1 Level 2 Level 3 Balance Assets Municipal bonds $ — $ 10,104 $ — $ 10,104 Commercial paper — 14,868 — 14,868 Corporate bonds — 73,684 — 73,684 Certificates of deposits — 1,245 — 1,245 US government and agency obligations — 2,209 — 2,209 Asset backed securities — 13,319 — 13,319 Mutual funds 3,752 — — 3,752 Total assets measured at fair value $ 3,752 $ 115,429 $ — $ 119,181 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 available for current operations. Observable inputs for these securities are yields, credit risks, default rates, and volatility. 49 Note 5 - Inventories Inventories consisted of the following (in thousands): June 3, 2023 May 28, 2022 Flocks, net of amortization $ 164,540 $ 144,051 Eggs and egg products 28,318 26,936 Feed and supplies 91,560 92,329 $ 284,418 $ 263,316 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 June 3, 2023 and May 28, 2022, consisted of approximately 10.8 million and 11.5 million pullets and breeders and 41.2 million and 42.2 million layers, respectively. The Company expensed amortization and mortality associated with the flocks to cost of sales as follows (in thousands): June 3, 2023 May 28, 2022 May 29, 2021 Amortization $ 186,973 $ 160,107 $ 133,448 Mortality 10,455 8,011 6,769 Total flock costs charged to cost of sales $ 197,428 $ 168,118 $ 140,217 Note 6 - Property, Plant and Equipment Property, plant and equipment consisted of the following (in thousands): June 3, 2023 May 28, 2022 Land and improvements $ 117,279 $ 109,833 Buildings and improvements 552,669 517,859 Machinery and equipment 715,205 655,925 Construction-in-progress 98,605 71,967 1,483,758 1,355,584 Less: accumulated depreciation 739,218 677,788 $ 744,540 $ 677,796 Depreciation expense was $ 69.4 million, $ 65.8 million and $ 56.5 million in the fiscal years ended June 3, 2023, May 28, 2022, and May 29, 2021, respectively. The Company maintains insurance for both property damage and business interruption relating to catastrophic events, such as fires. Insurance recoveries received for property damage and business interruption in excess of the net book value of damaged assets, clean-up and demolition costs, and post-event costs are recorded within “Gain on insurance recoveries” in the period received or committed when all contingencies associated with the recoveries are resolved. Losses related to property damage are recorded within “(Gains) loss on disposal of fixed assets”. Insurance recoveries relating to direct, recoverable costs for business interruption are recorded as a reduction in cost of sales on the Consolidated Statements of Income. Insurance claims incurred or finalized during the fiscal years ended June 3, 2023, May 28, 2022, and May 29, 2021 did not have a material effect on the Company’s consolidated financial statements. Note 7 - Investment in Unconsolidated Entities As of June 3, 2023 and May 28, 2022, the Company owned 50 % in Specialty Eggs, LLC (“Specialty Eggs”) and Southwest Specialty Eggs, LLC (“Southwest Specialty Eggs”), which are accounted for using the equity method of accounting. Specialty Eggs owns the Egg-Land's Best franchise for most of Georgia and South Carolina, as well as a portion of western North Carolina and eastern Alabama. Southwest Specialty Eggs owns the Egg-Land's Best franchise for Arizona, southern California and Clark County, Nevada (including Las Vegas). As of May 29, 2021, the Company owned 50 % in Red River which was acquired at the beginning of fiscal 2022 (see Note 2 – Acquisition ). The Company accounted for Red River using the equity method of accounting in fiscal 2021. 50 Equity method investments are included in “Investments in unconsolidated entities” in the accompanying Consolidated Balance Sheets and totaled $ 9.7 million and $ 10.5 million at June 3, 2023 and May 28, 2022, respectively. Equity in income of unconsolidated entities of $ 746 thousand, $ 1.9 million, and $ 622 thousand from these entities has been included in the Consolidated Statements of Income for fiscal 2023 , 2022, and 2021, respectively. The condensed consolidated financial information for the Company’s unconsolidated joint ventures was as follows (in thousands): For the fiscal year ended June 3, 2023 May 28, 2022 May 29, 2021 Net sales $ 222,602 $ 145,281 $ 119,853 Net income 1,492 3,942 1,596 Total assets 27,784 42,971 106,592 Total liabilities 9,854 21,892 5,850 Total equity 17,930 21,079 100,742 The following relates to the Company’s transactions with these unconsolidated affiliates (in thousands): For the fiscal year ended June 3, 2023 May 28, 2022 May 29, 2021 Sales to unconsolidated entities $ 136,351 $ 94,311 $ 56,765 Purchases from unconsolidated entities 75,024 60,016 76,059 Distributions from unconsolidated entities 1,500 400 6,663 June 3, 2023 May 28, 2022 Accounts receivable from unconsolidated entities $ 4,719 $ 10,815 Accounts payable to unconsolidated entities 3,187 4,678 Note 8 - Goodwill and Other Intangible Assets Goodwill and other intangibles consisted of the following (in thousands): Other Intangibles Franchise Customer Non-compete Right of Water Total Goodwill rights relationships agreements Use rights Trademark intangibles Balance May 29, 2021 $ 35,525 $ 16,699 $ 1,688 $ 1,019 $ 29 $ 720 $ 186 $ 55,866 Additions 8,481 — — — 10 — — 8,491 Amortization — ( 1,628 ) ( 362 ) ( 159 ) ( 21 ) — ( 50 ) ( 2,220 ) Balance May 28, 2022 44,006 15,071 1,326 860 18 720 136 62,137 Amortization — ( 1,657 ) ( 356 ) ( 152 ) ( 18 ) — ( 51 ) ( 2,234 ) Balance June 3, 2023 $ 44,006 $ 13,414 $ 970 $ 708 $ — $ 720 $ 85 $ 59,903 51 For the Other Intangibles listed above, the gross carrying amounts and accumulated amortization are as follows (in thousands): June 3, 2023 May 28, 2022 Gross carrying Accumulated Gross carrying Accumulated amount amortization amount amortization Other intangible assets: Franchise rights $ 29,284 $ ( 15,870 ) $ 29,284 $ ( 14,213 ) Customer relationships 9,644 ( 8,674 ) 9,644 ( 8,318 ) Non-compete agreements 1,450 ( 742 ) 1,450 ( 590 ) Right of use intangible 239 ( 239 ) 239 ( 221 ) Water rights * 720 — 720 — Trademark 400 ( 315 ) 400 ( 264 ) Total $ 41,737 $ ( 25,840 ) $ 41,737 $ ( 23,606 ) * Water rights are an indefinite life intangible asset. No significant residual value is estimated for these intangible assets. Aggregate amortization expense for fiscal years 2023, 2022, and 2021 totaled $ 2.2 million, $ 2.2 million, and $ 2.5 million, respectively. The following table presents the total estimated amortization of intangible assets for the five succeeding years (in thousands): For fiscal year Estimated amortization expense 2024 $ 2,170 2025 2,035 2026 1,831 2027 1,828 2028 1,758 Thereafter 5,555 Total $ 15,177 Note 9 - Employee Benefit Plans The Company maintains a medical plan that is qualified under Section 401(a) of the Internal Revenue Code and is not subject to tax under present income tax laws. The plan is funded by contributions from the Company and its employees. Under its plan, the Company self-insures its portion of medical claims for substantially all full-time employees. The Company uses stop-loss insurance to limit its portion of medical claims to $ 275,000 per occurrence. The Company's expenses including accruals for incurred but not reported claims were approximately $ 21.9 million, $ 24.6 million, and $ 21.7 million in fiscal years 2023, 2022, and 2021, respectively. The liability recorded for incurred but not reported claims was $ 2.9 million and $ 2.8 million as of June 3, 2023 and May 28, 2022, respectively and are classified within “Accrued expenses and other liabilities” in the Company’s Consolidated Balance Sheets. The Company has a KSOP plan that covers substantially all employees (the “Plan”). The Company makes contributions to the Plan at a rate of 3 % of participants eligible compensation, plus an additional amount determined at the discretion of the Board of Directors. Contributions can be made in cash or the Company’s Common Stock, and vest immediately. The Company’s cash contributions to the Plan were $ 4.3 million, $ 3.9 million, and $ 3.8 million in fiscal years 2023, 2022 and 2021, respectively. The Company did no t make direct contributions of the Company’s Common Stock in fiscal years 2023, 2022, or 2021. Dividends on the Company’s Common Stock are paid to the Plan in cash. The Plan acquires the Company’s Common Stock, which is listed on the NASDAQ, by using the dividends and the Company’s cash contribution to purchase shares in the public markets. The Plan sells Common Stock on the NASDAQ to pay benefits to Plan participants. Participants may make contributions to the Plan up to the maximum allowed by the Internal Revenue Service regulations. The Company does not match participant contributions. Deferred Compensation Plans The Company has deferred compensation agreements with certain officers for payments to be made over specified periods beginning when the officers reach age 65 or over as specified in the agreements. Amounts accrued for the agreements are based upon deferred compensation earned over the estimated remaining service period of each officer. Payments made under these agreements were $ 170 thousand in fiscal years 2023, 2022 and 2021. The liability recorded related to these agreements was 52 $ 1.0 million and $ 1.1 million at June 3, 2023 and May 28, 2022, respectively and are classified within “Other noncurrent liabilities” in the Company’s Consolidated Balance Sheets. The Company sponsors an unfunded, non-qualified deferred compensation plan, which was amended and restated effective December 1, 2021 (the “Amended DC Plan”) to expand eligibility for participation from named officers only to a select group of management or highly compensated employees of the Company, expand the investment options available and add the ability of participants to make elective deferrals. Participants may be awarded long-term incentive contributions (“Awards”) under the Amended DC Plan. Awards vest on December 31 st of the fifth year after such contribution is credited to the Amended DC Plan or, if earlier, the participant’s attainment of age 60 with 5 years of service. Awards issued under the Amended DC Plan were $ 388 thousand, $ 340 thousand, and $ 279 thousand in fiscal 2023, 2022, and 2021, respectively. Payments made under the Amended DC Plan were $ 410 thousand, $ 480 thousand and $ 55 thousand in fiscal 2023, 2022 and 2021, respectively. The liability recorded for the Amended DC Plan was $ 4.6 million, $ 4.5 million and $ 4.1 million at June 3, 2023, May 28, 2022 and 2021, respectively and is classified within “Other noncurrent liabilities” in the Company’s Consolidated Balance Sheets. Deferred compensation expense for both plans totaled $ 346 thousand, $ 258 thousand and $ 1.6 million in fiscal 2023, 2022, and 2021, respectively. Other Postretirement Employee Benefits The Company maintains an unfunded postretirement medical plan to provide limited health benefits to certain qualified retired employees and officers. Retired non-officers and spouses are eligible for coverage until attainment of Medicare eligibility, at which time coverage ceases. Retired officers and spouses are eligible for lifetime benefits under the plan. Officers, who retired prior to May 1, 2012 and their spouses must participate in Medicare Plans A and B. Officers, who retire on or after May 1, 2012 and their spouses must participate in Medicare Plans A, B, and D. The plan is accounted for in accordance with ASC 715, Compensation – Retirement Benefits (“ASC 715”), whereby an employer recognizes the funded status of a defined benefit postretirement plan as an asset or liability, and recognizes changes in the funded status in the year the change occurs through comprehensive income. Additionally, this expense is recognized on an accrual basis over the employees’ approximate period of employment. The liability associated with the plan was $ 2.7 million and $ 3.4 million at June 3, 2023 and May 28, 2022, respectively. The remaining disclosures associated with ASC 715 are immaterial to the Company’s financial statements. Effective March 1, 2023, the Company adopted a non-qualified supplemental executive retirement plan (“SERP”) and a split dollar life insurance plan (“Split Dollar Plan”) designed to provide deferred compensation and a pre-retirement death benefit for a select group of management or highly compensated employees of the Company. Provided the vesting conditions are met, participants in the SERP are eligible to receive an aggregate retirement benefit of $ 500,000 , which is paid in annual installments of $ 50,000 for 10 years . A participant becomes vested in the retirement benefit over five years of plan participation at 20 % per year. If a participant becomes disabled, attains the retirement age of 65, or the Company experiences a change in control, vesting will be accelerated to 100 %. If a participant dies while employed, he or she will not receive any benefits under the SERP, but their beneficiaries will instead be entitled to the life insurance benefit provided under the Split Dollar Plan, which is $500,000. The liability recorded for these plans was $ 63 thousand at June 3, 2023 and is classified within “Other noncurrent liabilities” in the Company’s Consolidated Balance Sheets. Note 10 - Credit Facility For fiscal years 2023, 2022 and 2021, interest expense was $ 583 thousand, $ 403 thousand, and $ 213 thousand, respectively, primarily related to commitment fees on the Credit Facility described below. On May 26, 2023, we entered into the First Amendment (the “Amendment”) to the Amended and Restated Credit Agreement, dated November 15, 2021 (as amended, the “Credit Agreement”). The Amendment replaced the London Interbank Offered Rate interest rate benchmark with the secured overnight financing rate as administered by the Federal Reserve Bank of New York or a successor administrator of the secured overnight financing rate (“SOFR”). The Credit Agreement has a five -year term. The Credit Agreement provides for a 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 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. No amounts were borrowed under the facility as of June 3, 2023 or May 28, 2022 or during fiscal 2023 or 53 fiscal 2022. The Company had $ 4.3 million of outstanding standby letters of credit issued under the Credit Facility at June 3, 2023. The interest rate in connection with loans made under the Credit Facility is based on, at the Company’s election, either the Adjusted Term SOFR Rate plus the Applicable Margin or the Base Rate plus the Applicable Margin. The “Adjusted Term SOFR” means with respect to any tenor, the per annum rate equal to the sum of (i) Term SOFR as defined in the Credit Agreement plus (ii) 0.10 % (10 basis points); provided, if Adjusted Term SOFR determined as provided above shall ever be less than the Floor, then Adjusted Term SOFR shall be deemed to be the Floor. The “Floor” means the rate per annum of interest equal to 0.00 %. 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 Adjusted Term SOFR for a one -month tenor plus 1.00 %. The “Applicable Margin” means 0.00 % to 0.75 % per annum for Base Rate Loans and 1.00 % to 1.75 % per annum for SOFR 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 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 June 3, 2023, we were in compliance with the covenant requirements of the Credit Facility. Note 11 - Equity The Company has two classes of capital stock: Common Stock and Class A Common Stock. Except as otherwise required by law or the Company's Second Restated Certificate of Incorporation (“Restated Charter”), holders of shares of the Company’s capital stock vote as a single class on all matters submitted to a vote of the stockholders, with each share of Common Stock entitled to one vote and each share of Class A Common Stock entitled to ten votes. Holders of capital stock have the right of cumulative voting in the election of directors. The Common Stock and Class A Common Stock have equal liquidation rights and the same dividend rights. In the case of any dividend payable in stock, holders of Common Stock are entitled to receive the same percentage dividend (payable only in shares of Common Stock) as the holders of Class A Common Stock receive (payable only in shares of Class A Common Stock). Upon liquidation, dissolution, or winding-up of the Company, the holders of Common Stock are entitled to share ratably with the holders of Class A Common Stock in all assets available for distribution after payment in full of creditors. The holders of Common Stock and Class A Common Stock are not entitled to preemptive or subscription rights. No class of capital stock may be combined or subdivided unless the other classes of capital stock are combined or subdivided in the same proportion. No dividend may be declared and paid on Class A Common Stock unless the dividend is payable only to the holders of Class A Common Stock and a dividend is declared and paid to Common Stock concurrently. Each share of Class A Common Stock is convertible, at the option of its holder, into one share of Common Stock at any time. The Company’s Restated Charter identifies family members of Mr. Adams (“Immediate Family Members”) and arrangements 54 and entities that are permitted to receive and hold shares of Class A Common Stock, with ten votes per share, without such shares converting into shares of Common Stock, with one vote per share (“Permitted Transferees”). The Permitted Transferees include arrangements and entities such as revocable trusts and limited liability companies that could hold Class A Common Stock for the benefit of Immediate Family Members. Each Permitted Transferee must have a relationship, specifically defined in the Restated Charter, with another Permitted Transferee or an Immediate Family Member. A share of Class A Common Stock transferred to a person other than a Permitted Transferee would automatically convert into Common Stock with one vote per share. Additionally, the Restated Charter includes a sunset provision pursuant to which all of the outstanding Class A Common Stock will automatically convert to Common Stock if: (a) less than 4,300,000 shares of Class A Common Stock, in the aggregate, are beneficially owned by Immediate Family Members and/or Permitted Transferees, or (b) if less than 4,600,000 shares of Class A Common Stock and Common Stock, in the aggregate, are beneficially owned by Immediate Family Members and/or Permitted Transferees. Note 12 - Net Income per Common Share Basic net income per share attributable to Cal-Maine Foods, Inc. is based on the weighted average Common Stock and Class A Common Stock outstanding. Diluted net income per share attributable to Cal-Maine Foods, Inc. 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 attributable to Cal-Maine Foods, Inc. (amounts in thousands, except per share data): June 3, 2023 May 28, 2022 May 29, 2021 Numerator Net income $ 756,732 $ 132,441 $ 2,060 Less: Net loss attributable to noncontrolling interest ( 1,292 ) ( 209 ) — Net income attributable to Cal-Maine Foods, Inc. $ 758,024 $ 132,650 $ 2,060 Denominator Weighted-average common shares outstanding, basic 48,648 48,581 48,522 Effect of dilutive securities of restricted shares 186 153 134 Weighted-average common shares outstanding, diluted 48,834 48,734 48,656 Net income per common share attributable to Cal-Maine Foods, Inc. Basic $ 15.58 $ 2.73 $ 0.04 Diluted $ 15.52 $ 2.72 $ 0.04 Note 13 - Revenue Recognition Satisfaction of Performance Obligation The vast majority of the Company’s revenue is derived from agreements 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. 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 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. Costs to deliver product to customers are included in selling, general and administrative expenses in the accompanying Consolidated Statements of Income and totaled $ 77.5 million, $ 62.7 million, and $ 52.7 million in fiscal years 2023, 2022, and 2021, respectively. 55 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 allowance for expected customer returns using historical return data and comparing to current period sales and accounts receivable . The allowance is recorded as a reduction of sales in the same period the revenue is recognized. 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): 14 Weeks Ended 13 Weeks Ended 53 Weeks Ended 52 Weeks Ended June 3, 2023 May 28, 2022 June 3, 2023 May 28, 2022 Conventional shell egg sales $ 395,433 $ 378,190 $ 2,051,961 $ 1,061,995 Specialty shell egg sales 256,190 186,518 956,993 648,838 Egg products 33,996 26,488 122,270 60,004 Other 3,061 1,768 14,993 6,322 $ 688,680 $ 592,964 $ 3,146,217 $ 1,777,159 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 June 3, 2023 and May 28, 2022, 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. Concentration of Credit Risks Our largest customer, Walmart Inc. (including Sam's Club) accounted for 34.2 %, 29.5 % and 29.8 % of net sales dollars for fiscal 2023, 2022, and 2021, respectively. H-E-B, LP accounted for 10.1 % of net sales dollars for fiscal 2021. Note 14 - Stock Compensation Plans On October 2, 2020, shareholders approved the Amended and Restated Cal-Maine Foods, Inc. 2012 Omnibus Long-Term Incentive Plan (the “LTIP Plan”). The purpose of the LTIP Plan is to assist us and our subsidiaries in attracting and retaining selected individuals who are expected to contribute to our long-term success. The maximum number of shares of Common Stock available for awards under the LTIP Plan is 2,000,000 of which 941,593 shares remain available for issuance, and may be authorized but unissued shares or treasury shares. Awards may be granted under the LTIP Plan to any employee, any non- employee member of the Company’s Board of Directors, and any consultant who is a natural person and provides services to us or one of our subsidiaries (except for incentive stock options, which may be granted only to our employees). The only outstanding awards under the LTIP Plan are restricted stock awards. The restricted stock vests three years from the grant date, or upon death or disability, change in control, or retirement (subject to certain requirements). The restricted stock contains no other service or performance conditions. Restricted stock is awarded in the name of the recipient and, except for the right of 56 disposal, constitutes issued and outstanding shares of the Company’s Common Stock for all corporate purposes during the period of restriction including the right to receive dividends. Compensation expense is a fixed amount based on the grant date closing price and is amortized on a straight-line basis over the vesting period. Forfeitures are recognized as they occur. Total stock-based compensation expense was $ 4.2 million, $ 4.1 million, and $ 3.8 million in fiscal 2023, 2022, and 2021, respectively. Our unrecognized compensation expense as a result of non-vested shares was $ 7.2 million at June 3, 2023 and $ 7.0 million at May 28, 2022. The unrecognized compensation expense will be amortized to stock compensation expense over a period of 2.1 years. A summary of our equity award activity and related information for our restricted stock is as follows: Number of Shares Weighted Average Grant Date Fair Value Outstanding, May 29, 2021 302,147 $ 39.37 Granted 113,142 41.13 Vested ( 92,918 ) 42.45 Forfeited ( 4,527 ) 38.01 Outstanding, May 28, 2022 317,844 $ 39.12 Granted 84,969 54.10 Vested ( 98,684 ) 38.25 Forfeited ( 9,989 ) 39.69 Outstanding, June 3, 2023 294,140 $ 43.72 Note 15 - Income Taxes Income tax expense (benefit) consisted of the following: Fiscal year ended June 3, 2023 May 28, 2022 May 29, 2021 Current: Federal $ 180,521 $ 24,228 $ ( 35,090 ) State 36,830 3,670 730 217,351 27,898 ( 34,360 ) Deferred: Federal 19,952 2,716 21,658 State 4,515 2,960 693 24,467 5,676 22,351 $ 241,818 $ 33,574 $ ( 12,009 ) 57 Significant components of the Company’s deferred tax liabilities and assets were as follows: June 3, 2023 May 28, 2022 Deferred tax liabilities: Property, plant and equipment $ 109,590 $ 100,250 Inventories 44,986 31,987 Investment in affiliates 1,133 65 Other 5,702 5,713 Total deferred tax liabilities 161,411 138,015 Deferred tax assets: Accrued expenses 3,838 4,041 State operating loss carryforwards 78 470 Other comprehensive income 1,317 866 Other 3,966 4,442 Total deferred tax assets 9,199 9,819 Net deferred tax liabilities $ 152,212 $ 128,196 The differences between income tax expense (benefit) at the Company’s effective income tax rate and income tax expense at the statutory federal income tax rate were as follows: Fiscal year end June 3, 2023 May 28, 2022 May 29, 2021 Statutory federal income tax $ 209,418 $ 34,907 $ ( 2,087 ) State income taxes, net 32,662 5,237 1,124 Domestic manufacturers deduction — — 3,566 Enacted net operating loss carryback provision — — ( 16,014 ) Tax exempt interest income — ( 9 ) ( 50 ) Reversal of outside basis in equity investment Red River — ( 7,310 ) — Non-taxable remeasurement gain Red River — ( 955 ) — Other, net ( 262 ) 1,704 1,452 $ 241,818 $ 33,574 $ ( 12,009 ) As of June 3, 2023, we had no significant unrecognized tax benefits. Accordingly, the Company had no accrued interest and penalties related to uncertain tax positions. We are subject to income tax in many jurisdictions within the U.S. We are currently not under audit by the Internal Revenue Service or by any state and local tax authorities. Tax periods for all years beginning with fiscal year 2020 remain open to examination by federal and state taxing jurisdictions to which we are subject. 58 Note 16 - Commitments and Contingencies 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. On August 16, 2022, the appeals court reversed and remanded the case back to the trial court for further proceedings. On October 31, 2022, the Company and WCF appealed the First District Court’s decision to the Supreme Court of Texas. On May 10, 2023, the Company filed its brief on the merits, and the State of Texas filed its brief on June 29, 2023. The Company filed its reply brief on July 14, 2023. 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 dismissed the case without prejudice. On July 13, 2022, the court denied the plaintiffs’ motion to set aside or amend the judgment to amend their complaint. On March 15, 2022, plaintiffs filed a second suit against the Company and several defendants in Bell et al. v. Cal-Maine Foods et al., Case No. 1:22-cv-246, in the Western District of Texas, Austin Division alleging the same assertions as laid out in the first complaint. On August 12, 2022, the Company and other defendants in the case filed a motion to dismiss the plaintiffs’ class action complaint. On January 9, 2023, the court entered an order and final judgement granting the Company’s motion to dismiss. On February 8, 2023, the plaintiffs appealed the lower court’s judgement to the United States Court of Appeals for the Fifth Circuit, Case No. 23-50112. The parties filed their respective appellate briefs, but the court has not ruled on these submissions. Management believes the risk of material loss related to both matters to be remote. 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, until a subsequent settlement was reached as described below, The Kellogg Company. 59 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. On May 2, 2022, the court set trial for October 24, 2022, but on September 20, 2022, the court cancelled the trial date due to COVID-19 protocols and converted the trial date to a status hearing to reschedule the jury trial. Trial is now set for October 16, 2023. 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, and on March 28, 2022, the court dismissed the Company with prejudice. 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: two earlier trials based on substantially the same facts and legal arguments resulted in findings of no conspiracy and/or damages; this 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., Cobb-Vantress, Inc., Cargill, Inc., George’s, Inc., Peterson Farms, Inc. and Simmons Foods, Inc., and certain of their affiliates. The State of Oklahoma claims that through the disposal of chicken litter the defendants polluted the Illinois River Watershed. This watershed provides water to eastern Oklahoma. The complaint sought injunctive relief and monetary damages, but the claim for monetary damages was dismissed by the court. Cal-Maine Foods, Inc. discontinued operations in the watershed in or around 2005. 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. We also have a number of small contract producers that operate in the area. The non-jury trial in the case began in September 2009 and concluded in February 2010. On January 18, 2023, the court entered findings of fact and conclusions of law in favor of the State of Oklahoma, but no penalties were assessed. The court found the defendants liable for state law nuisance, federal common law nuisance, and state law trespass. The court also found the producers vicariously liable for the actions of their contract producers. The court directed the parties to confer in attempt to reach agreement on appropriate remedies. On June 12, 2023, the court ordered the parties to mediate before the Tenth Circuit Chief Judge Deanell Reece Tacha and instructed the parties to file a joint status report fourteen days following mediation. The mediation has not yet been set but is expected to be in the September to October time frame this fall. While management believes there is a reasonable possibility of a material loss from the case, 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: uncertainties inherent in any assessment of potential costs associated with injunctive relief or other penalties based on a decision in a case tried over 13 years ago based on environmental conditions that existed at the time, the lack of guidance from the court as to what might be considered appropriate remedies, the ongoing negotiations with the State on appropriate remedies and upcoming mediation, and uncertainty regarding what our proportionate share of any remedy would be, although we believe that our share compared to the other defendants is small. 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. 60 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Fiscal Years ended June 3, 2023, May 28, 2022, and May 29, 2021 (in thousands) Description Balance at Beginning of Period Charged to Cost and Expense Write-off of Accounts Balance at End of Period Year ended June 3, 2023 Allowance for doubtful accounts $ 775 $ ( 148 ) $ 48 $ 579 Year ended May 28, 2022 Allowance for doubtful accounts $ 795 $ 30 $ 50 $ 775 Year ended May 29, 2021 Allowance for doubtful accounts $ 743 $ 135 $ 83 $ 795 61 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.