Unassociated Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
      For The Fiscal Year Ended   MAY 28, 2011

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

Commission file number:  000-04892

CAL-MAINE FOODS, INC.
(Exact name of registrant as specified in its charter)

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

3320 Woodrow Wilson Avenue, Jackson, Mississippi  39209
(Address of principal executive offices)  (Zip Code)

(601) 948-6813
(Registrant’s telephone number, including area code)

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

Title of each Class:
 
Name of exchange on
which registered:
Common Stock,  $0.01 par
value per share
 
The NASDAQ Global Market
 
Securities registered pursuant to Section 12 (g) of the Act:  NONE

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x
No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨
No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Smaller reporting company ¨

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

The aggregate market value, as reported by The NASDAQ Global Market, of the registrant’s Common Stock, $0.01 par value, held by non-affiliates at November 27, 2010, which was the date of the last business day of the registrant’s most recently completed second fiscal quarter, was $446,714,900.

As of August 1, 2011, 21,465,091 shares of the registrant’s Common Stock, $0.01 par value, and 2,400,000 shares of the registrant’s Class A Common Stock, $0.01 par value, were outstanding.

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

 
 

 

TABLE OF CONTENTS

Item
 
Page
Number
     
 
Part I
 
     
1.
Business
3
1A.
Risk Factors
9
1B.
Unresolved Staff Comments
13
2.
Properties
13
3.
Legal Proceedings
13
4.
(Removed and Reserved)
16
 
Part II
 
     
5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
17
6.
Selected Financial Data
18
7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
7A.
Quantitative and Qualitative Disclosures About Market Risk
32
8.
Financial Statements and Supplementary Data
33
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
70
9A.
Controls and Procedures
70
9B.
Other Information
72
     
 
Part III
 
     
10.
Directors, Executive Officers and Corporate Governance
73
11.
Executive Compensation
73
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
73
13.
Certain Relationships and Related Transactions, and Director Independence
73
14.
Principal Accountant Fees and Services
73
     
 
Part IV
 
     
15.
Exhibits, Financial Statement Schedules
74
     
 
Signatures
77

 
2

 

PART I

FORWARD-LOOKING STATEMENTS

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

ITEM 1.  BUSINESS

Our Business

Cal-Maine Foods, Inc. (“we,” “us,” “our,” or the “Company”) is the largest producer and marketer of shell eggs in the United States. In fiscal 2011, we sold approximately 821.4 million dozen shell eggs, which represented approximately 18% of domestic shell egg consumption. Our total flock of approximately 26.8 million layers and 6.7 million pullets and breeders is the largest in the United States. Layers are mature female chickens, pullets are young female chickens usually under 20 weeks of age, and breeders are male or female chickens used to produce fertile eggs to be hatched for egg production flocks.

We operate in a single segment. Our primary business is the production, grading, packaging, marketing and distribution of shell eggs. We sell most of our shell eggs in 29 states, primarily in the southwestern, southeastern, mid-western and mid-Atlantic regions of the United States. We market our shell eggs through our extensive distribution network to a diverse group of customers, including national and regional grocery store chains, club stores, foodservice distributors and egg product manufacturers. The strength of our position is evidenced by the fact that we have the largest market share in the grocery segment for shell eggs, and we sell shell eggs to a majority of the largest food retailers in the United States.

We are also one of the largest producers and marketers of value-added specialty shell eggs in the United States. Specialty shell eggs include nutritionally enhanced, cage free and organic eggs and are a rapidly growing segment of the market. In fiscal 2011, specialty shell eggs represented approximately 24% of our shell egg dollar sales, as compared to 21% for fiscal 2010. Retail prices for specialty eggs are less cyclical than non-specialty shell egg prices and are generally higher due to consumer willingness to pay for the increased benefits from those products. We market our specialty shell eggs under the following brands: Egg-Land’s Best(TM), Farmhouse(TM), and 4-Grain(TM).  We are a member of the Egg-Land’s Best, Inc. cooperative, which markets the leading brand in the specialty shell egg segment. We have exclusive license agreements to market and distribute Egg-Land’s Best(TM) specialty shell eggs in major metropolitan areas, including New York City, and a number of states in the southeast and southwest. We market cage free eggs under our trademarked Farmhouse brand and distribute those shell eggs across the southeast and southwest regions of the United States.   We market organic, all natural, cage-free, vegetarian, and omega-3 eggs under our 4-Grain trademark. We also produce market and distribute private label specialty shell eggs to several customers. Sales of specialty shell eggs accounted for approximately 16% of our total shell egg dozen volumes in fiscal 2011, as compared to approximately 14% in fiscal 2010.

We are also a leader in industry consolidation. Since 1989, we have completed sixteen acquisitions ranging in size from 600,000 layers to 7.5 million layers. Despite a market that has been characterized by increasing consolidation, the shell egg production industry remains highly fragmented. According to Egg Industry Magazine, there currently are 56 producers who each own more than one million layers and the ten largest producers own approximately 49% of total industry layers. We believe industry consolidation will continue and we plan to capitalize on opportunities as they arise.

 
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Industry Background

Based on historical consumption trends, demand for shell eggs increases in line with overall population growth, averaging an increase of about 1% per year. According to U.S. Department of Agriculture (“USDA”) reports, since 2000, annual per capita consumption in the United States has varied between 247 and 258 eggs. In calendar year 2010, per capita consumption in the United States was estimated to be 247 eggs, or approximately five eggs per person per week.

Prices for Shell Eggs

Shell egg prices are a critical component of profitability in the industry. We estimate that over 90% of all shell eggs sold in the United States in the retail and foodservice channels are sold at prices related to the Urner Barry wholesale quotation for shell eggs. For fiscal 2011, wholesale large shell egg prices in the southeast region averaged $1.13 per dozen compared to an average of $1.23 per dozen for fiscal years 2008 to 2010.  Based on USDA reports, the Company expects that the table egg laying flock will contract in the upcoming months of calendar year 2011 as compared to the same period in calendar 2010.  Because of higher feed costs, there is a strong disincentive to expand the table egg laying flock.  Although there is an anticipated contraction in the laying flock, shell egg production for the remainder of calendar year 2011 is expected to be slightly above production during the comparable period of calendar year 2010, due to an expected increase in the rate of lay for the table egg laying flock.   Shell egg prices through the calendar year third quarter (i.e. July, August, September) of 2011 are expected to be slightly above the prices for the same period (i.e. July, August, September) of calendar year 2010.   Due to continued weakness in the US economy, shell egg prices through the calendar year fourth quarter (i.e. October, November, December) of 2011 are expected to be slightly lower than shell egg prices during the same period (i.e. October, November, December) of calendar 2010.

Feed Costs for Shell Egg Production

Feed is a primary cost component in the production of shell eggs and represents over half of industry farm level production costs. Most shell egg producers are vertically integrated, manufacturing the majority of the feed they require themselves. Although feed ingredients, primarily corn and soybean meal, are available from a number of sources, prices for ingredients can fluctuate and can be affected by weather and by various supply and demand factors. Feed prices for fiscal 2011 were higher than the previous year.

Growth Strategy and Acquisitions

For many years, we have pursued a growth strategy focused on the acquisition of existing shell egg production and processing facilities, as well as the construction of new and more efficient facilities.  Since the beginning of fiscal 1989, we have completed sixteen acquisitions. In addition, we have built seven new “in-line” shell egg production and processing facilities and one pullet growing facility which added eight million layers and 1.5 million growing pullets to our capacity.  Each of the new shell egg production facilities generally provides for the processing of approximately 400 cases of shell eggs or 12,000 dozen eggs per hour. These increases in capacity have been accompanied by the retirement of older and less efficient facilities and a reduction in eggs produced by contract producers.  The “in-line” facilities result in the gathering, grading and packaging of shell eggs by less labor-intensive, more efficient, mechanical means.

As a result of our strategy, our total flock, including pullets, layers and breeders, has increased from approximately 28.8 million at June 03, 2006 to approximately 33.5 million as of May 28, 2011.  Also, the number of dozens of shell eggs sold has increased from approximately 683.1 million in the fiscal year ended June 03, 2006 to 821.4 million for the fiscal year ending May 28, 2011.  Net sales amounted to $942.0 million in fiscal 2011 compared to net sales of $477.6 million in fiscal 2006.

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

 
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Through exclusive license agreements with Egg-Land’s Best, Inc. in several key territories and our trademarked Farmhouse and 4-Grain brands, we are one of the leading producers and marketers of value-added specialty shell eggs. We also produce, market, and distribute private label specialty shell eggs to several customers. Since selling prices of specialty shell eggs are not as volatile as generic shell egg prices, we believe that growing our specialty eggs business will enhance the stability of our margins. We expect that the price of specialty eggs will remain at a premium to regular shell eggs. We intend to pursue acquisitions that may expand our sales of specialty shell eggs.   As part of our Tampa Farms acquisition in fiscal 2009, we acquired the 4-Grain brand of specialty eggs. We market organic, all natural, cage-free, vegetarian, and omega-3 eggs under our 4-Grain trademark.

Federal anti-trust laws require regulatory approval of acquisitions that exceed certain threshold levels of significance.  Also, we are subject to federal and state laws generally prohibiting anti-competitive conduct.  Because the shell egg production and distribution industry is so fragmented, we believe that our sales of shell eggs during the last fiscal year represented approximately 18% of domestic shell egg sales, and we believe that we are the largest producer and distributor of shell eggs in the United States based on independently prepared industry statistics. We believe that either regulatory approval of any future acquisitions will not be required, or, if required, that we are likely to obtain such approvals.

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

Shell Eggs

ProductionOur operations are fully integrated. At our facilities, we hatch chicks, grow pullets, manufacture feed and produce and distribute shell eggs.  Company-owned facilities accounted for approximately 92% of our total fiscal 2011 egg production, with the balance attributable to contract producers used by us. Under arrangements with our contract producers, we own the entire flock, furnish all feed and supplies, own the shell eggs produced and assume all market risks.  The contract producers own and operate their facilities and are paid a fee based on production with incentives for performance.

The commercial production of shell eggs requires a source of baby chicks for laying flock replacement. We produce approximately 95% of our chicks in our own hatcheries and obtain the balance from commercial sources. We own breeder facilities producing 15.5 million pullet chicks per year in a computer-controlled environment. These pullets are distributed to 37 state-of-the-art laying operations around the southwestern, southeastern, mid-western and mid-Atlantic regions of the United States. The facilities produce an average of 1.7 million dozen shell eggs per day and process the shell eggs through grading and packaging without handling by human hands. We have spent a cumulative total of $116.4 million over the past five years upgrading our facilities with the most advanced equipment and technology available in our industry. We believe our focus on automation throughout the supply chain enables us to be a low cost supplier in all the markets in which we compete.

Feed cost represents the largest element of our farm egg production cost, ranging from 58% to 64% of total farm production cost in the last five years. Although feed ingredients are available from a number of sources, we have little, if any, control over the prices of the ingredients we purchase, which are affected by weather and by various supply and demand factors.  Increases in feed costs which are not accompanied by increases in the selling price of eggs can have a material adverse effect on our operations.  However, higher feed costs may encourage shell egg producers to reduce production, possibly resulting in higher egg prices.  Alternatively, low feed costs can encourage industry overproduction, possibly resulting in lower egg prices.

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

Our egg production activities are subject to risks inherent in the agriculture industry, such as weather conditions and disease factors.  These risks are not within our control and could have a material adverse effect on our operations.  Also, the marketability of our shell eggs is subject to risks such as possible changes in food consumption opinions and practices reflecting perceived health concerns.

 
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We operate in a cyclical industry with total demand that is generally steady and a product that is price-inelastic.  Thus, small increases in production or decreases in demand can have a large adverse effect on prices and vice-versa.  However, economic conditions in the egg industry are expected to exhibit less cyclicality in the future.  The industry is concentrating into fewer but stronger hands, which should help lessen the extreme cyclicality of the past.
 
MarketingOf the 821 million dozen shell eggs sold by us in the fiscal year ended May 28, 2011, our flocks produced 634 million.

We sell our shell eggs to a diverse group of customers, including national and local grocery store chains, club stores, foodservice distributors, and egg product manufacturers. We utilize electronic ordering and invoicing systems that enable us to manage inventory for certain of our customers. Our top ten customers accounted for an aggregate of 65.4% of net sales dollars in fiscal 2011 and 71.0% of net sales dollars for fiscal 2010. One customer, Publix Super Markets, Inc., accounted for 10.0% of net sales dollars during fiscal 2011 and 10.1% of net sales dollars for fiscal 2010, and two affiliated customers, Wal-Mart Stores and Sam’s Club, on a combined basis, accounted for 32.6% of net sales dollars during fiscal 2011 and 36.4% of net sales dollars for fiscal 2010.

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

The shell eggs we sell are delivered by us to our customers’ warehouses and facilities either with our own fleet of owned or contracted refrigerated delivery trucks or are picked up by our customers at our processing facilities.

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

According to USDA reports, for the past five years, annual per capita consumption in the United States has varied between 247 and 258 eggs. Per capita consumption is determined by taking the total supply of eggs for the shell egg industry divided by the entire population in the United States (i.e. all eggs supplied domestically by the shell egg industry are consumed).   While we believe that fast food restaurant consumption, high protein diet trends, reduced egg cholesterol levels, and industry advertising campaigns may result in the sustainability of current per capita egg consumption levels, no assurance can be given that per capita consumption will not decline in the future.

We sell the majority of our shell eggs in approximately 29 states across the southwestern, southeastern, mid-western and mid-Atlantic regions of the United States. We are a major factor in egg marketing in a majority of these states.  Many states in our market area are egg deficit regions.  Egg deficit regions are areas where production of fresh shell eggs is less than total consumption.  Competition from other producers in specific market areas is generally based on price, service, and quality of product.  Strong competition exists in each of our markets.

Seasonality.  Shell eggs are perishable. Consequently, we maintain very low shell egg inventories, usually consisting of approximately four days of production.  Retail sales of shell eggs are greatest during the fall and winter months and lowest during the summer months.  Prices for shell eggs fluctuate in response to seasonal demand factors and a natural increase in egg production during the spring and early summer. We generally experience lower sales and net income in our fourth and first fiscal quarters ending in May and August, respectively. During the past ten years, six of our first quarters have resulted in net operating losses, and during this same period, three of our fourth quarters have resulted in net operating losses.

Specialty Eggs. We also produce specialty eggs such as Egg-Land’s Bestä, 4-Grain, and Farmhouse eggs.  These specialty eggs are intended to meet the demands of consumers who are sensitive to environmental and animal welfare issues.  The statistical data concerning specialty egg sales reflects the upward trend of specialty eggs.  For fiscal 2011, specialty eggs accounted for 24.0% of shell egg dollar sales and 16.1% of shell egg dozens sold, as compared to 21.4% of shell egg dollar sales and 14.4% of shell egg dozens sold in fiscal 2010.  Egg-Land’s Bestä eggs are patented eggs that are believed by its developers, based on scientific studies, to cause no increase in serum cholesterol when eaten as part of a low fat diet. We produce and process Egg-Land’s Bestä eggs under license from Egg-Land’s Best, Inc. (“EB”) at our existing facilities under EB guidelines.  The product is marketed to our established base of customers at prices that reflect a premium over non-specialty shell eggs. Egg-Land’s Bestä eggs accounted for approximately 15.6% of our shell egg dollar sales in fiscal 2011, as compared to 13.9% in fiscal 2010. Based on dozens sold, Egg-Land’s Bestä eggs accounted for 10.4% of dozens sold for fiscal 2011, as compared to 9.2% in fiscal 2010.  Farmhouse brand eggs are produced at our facilities by hens that are not caged, and are provided with a diet of natural grains.  Our 4-Grain brand consists of both caged and cage free eggs.   Our hens are fed a diet of four all natural grains, no animal by-products, and all vegetarian feed.  As in our other flocks, these hens are provided with drinking water that is free of hormones or other chemical additives.  In fiscal 2009, we acquired the 4-Grain brand of specialty eggs, which includes organic, all natural, cage-free, vegetarian, and omega-3 eggs.  Farmhouse, 4-Grain and other non-EB specialty eggs accounted for 8.4% of our shell egg dollar sales in fiscal 2011, as compared to 7.5% in fiscal 2010. Farmhouse, 4-Grain, and other non-EB specialty eggs accounted for 5.7% of dozens sold for fiscal 2011, as compared to 5.3% for fiscal 2010.

 
6

 

Egg Products.  Egg products are shell eggs that are broken and sold in liquid, frozen, or dried form.  In fiscal 2011 egg products represented 3% of our net sales, as compared to 3% in fiscal 2010.  We sell our egg products primarily into the institutional and food service sectors in the U.S.  Our egg products are sold through American Egg Products, LLC located in Blackshear, Georgia and Texas Egg Products, LLC located in Waelder, Texas.  Prices for egg products are directly related to Urner Barry quoted price levels.
 
CompetitionThe production, processing, and distribution of shell eggs is an intensely competitive business, which traditionally has attracted large numbers of producers.  Shell egg competition is generally based on price, service, and quality of production.

The shell egg industry remains highly fragmented but is characterized by a growing concentration of producers. In 2010, 56 producers with one million or more layers owned 89% of the 286 million total U.S. layers, compared to 56 producers with one million or more layers owning 64% of the 232 million total U.S. layers in 1990, and 61 producers with one million or more layers owning 56% of the 248.0 million total U.S. layers in 1985. We believe that a continuation of that concentration trend may result in the reduced cyclicality of shell egg prices, but no assurance can be given in that regard. A continuation of this trend could also create greater competition among fewer producers.

Patents and Trade NamesWe own the trade names Farmhouse, Rio Grande, Sunups, Sunny Meadows and 4-Grain. We do not own any patents or proprietary technologies. We produce and market Egg-Land's BestTM eggs under license agreements with EB.   We believe that these trade names and license agreements are important to our business.  We do not know of any infringing uses that would materially affect the use of these trade names, and we actively defend and enforce them.

Government RegulationOur facilities and operations are subject to regulation by various federal, state and local agencies, including, but not limited to, the United States Food and Drug Administration (“FDA”), the USDA, Environmental Protection Agency, Occupational Safety and Health Administration and corresponding state agencies. The applicable regulations relate to grading, quality control, labeling, sanitary control and waste disposal. Our shell egg facilities are subject to periodic USDA and FDA inspections. Our feed production facilities are subject to FDA regulation and inspections. In addition, we maintain our own inspection program to assure compliance with our own standards and customer specifications. We are not aware of any major capital expenditures necessary to comply with such statutes and regulations; however, there can be no assurance that we will not be required to incur significant costs for compliance with such statutes and regulations in the future.

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

Employees. As of May 28, 2011, we had approximately 2,100 employees, 1,800 of whom worked in egg production, processing and marketing, 110 of whom were engaged in feed mill operations and 190 of whom were administrative employees, including our executive officers.  Approximately 3% of our personnel are part-time.  None of our employees are covered by a collective bargaining agreement.  We consider our relations with employees to be good.

 
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Our Corporate Information

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

Our Common Stock is listed on The NASDAQ Global Market (“NASDAQ”) under the symbol “CALM”. On May 28, 2011, the last sale price of our Common Stock on NASDAQ was $28.93 per share. Our fiscal year 2011 ended May 28, 2011, and the first three fiscal quarters of fiscal 2011 ended August 28, 2010, November 27, 2010, and February 26, 2011. All references herein to a fiscal year means our fiscal year and all references to a year mean a calendar year.

We have adopted a Code of Conduct and Ethics for Directors, Officers and Employees, including the chief executive and principal financial and accounting officers of the Company. We will provide a copy of the code free of charge to any person that requests a copy by writing to:

Cal-Maine Foods, Inc.
P.O. Box 2960
Jackson, Mississippi 39207
Attn.:  Investor Relations

Requests can be made by phone at (601) 948-6813

A copy is also available at our website www.calmainefoods.com.  We intend to disclose any amendments to, or waivers from, the Code of Conduct and Ethics for Directors, Officers and Employees on our website promptly following the date of any such amendment or waiver.  Information contained on our website is not a part of this report.

 
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ITEM 1A. RISK FACTORS

Our business and results of operations are subject to numerous risks and uncertainties, many of which are beyond our control.  The following is a description of some of the most significant factors that may materially affect our business, financial condition or results of operations.  They should be considered carefully, in addition to the information set forth elsewhere in this Annual Report on Form 10-K, including under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in making any investment decisions with respect to our securities.

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

Our operating results are significantly affected by wholesale shell egg market prices, which fluctuate widely and are outside of our control.  As a result, our prior performance should not be presumed to be an accurate indication of future performance. Small increases in production or small decreases in demand can have a large adverse effect on shell egg prices. Shell egg prices trended upward from calendar 2002 until late 2003 and early 2004 when they rose to historical highs.  In the early fall of calendar 2004, the demand trend related to the increased popularity of high protein diets faded dramatically and prices fell.  During the time of increased demand, the egg industry had geared up to produce more eggs, resulting in an oversupply of eggs.  Since calendar 2006, supplies appear to be more closely balanced with demand and egg prices again reached record levels during 2007 and 2008.  Egg prices have since retreated from those record price levels due to small increases in industry supply. There can be no assurance that shell egg prices will remain at or near current levels or that the supply of and demand for shell eggs will remain level in the future. In general, a 1% increase or decrease in industry supply will translate into a 7% corresponding change in shell egg prices.

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

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

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

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

Feed cost represents the largest element of our shell egg production (farm) cost, ranging from 58% to 64% of total farm production cost in the last five years. Although feed ingredients are available from a number of sources, we have little, if any, control over the prices of the ingredients we purchase, which are affected by weather and by various supply and demand factors.  Increases in feed costs not accompanied by increases in the selling price of eggs can have a material adverse effect on the results of our operations.  Alternatively, low feed costs can encourage industry overproduction, possibly resulting in lower egg prices.

Due to the cyclical nature of our business, our financial results from year to year may fluctuate.

The shell egg industry has traditionally been subject to periods of high profitability followed by periods of significant loss. In the past, during periods of high profitability, shell egg producers have tended to increase the number of layers in production with a resulting increase in the supply of shell eggs, which generally has caused a drop in shell egg prices until supply and demand return to balance. As a result, our financial results from year to year may vary significantly.

 
9

 

We purchase approximately 23% of the shell eggs we sell from outside producers and our ability to obtain such eggs at prices and in quantities acceptable to us could fluctuate.

We produce approximately 77% of the total number of shell eggs sold by us and purchase the remaining amount from outside producers. As the wholesale price for shell eggs increases, our cost to acquire shell eggs from outside producers also increases. There can be no assurance that we will be able to continue to acquire shell eggs from outside producers in quantities and prices that are satisfactory and our inability to do so may have a material adverse affect on our business and profitability.

Our acquisition growth strategy subjects us to various risks.

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

 
-
will identify suitable acquisition candidates;

 
-
can consummate acquisitions on acceptable terms; or

 
-
can successfully integrate any acquired business into our operations or successfully manage the operations of any acquired business.

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

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

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

For the fiscal years 2011, 2010, and 2009, two affiliated customers, Wal-Mart Stores and Sam’s Clubs, on a combined basis, accounted for 32.6%, 36.4%, and 32.9% of our net sales dollars, respectively. For fiscal years 2011 and 2010, Publix Super Markets, Inc., accounted for 10.0% and 10.1% of net sales dollars, respectively. For fiscal years 2011, 2010, and 2009, our top ten customers accounted for 65.4%, 71.0%, and 65.5% of net sales dollars during those periods. We have established long-term relationships with most of our customers, who continue to purchase from us based on our ability to service their needs. If, for any reason, one or more of our larger customers were to purchase significantly less of our shell eggs in the future or were to terminate their purchases from us, and we are not able to sell our shell eggs to new customers at comparable levels, it would have a material adverse effect on our business, financial condition and results of operations.

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

We are subject to federal and state regulations relating to grading, quality control, labeling, sanitary control and waste disposal. As a fully-integrated shell egg producer, our shell egg facilities are subject to USDA and FDA regulation, as well as regulation by various state and local health and agricultural agencies. Our shell egg processing facilities are subject to periodic USDA inspections. All of our shell egg and feed mill facilities are subject to FDA regulation and inspections.

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

 
10

 

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

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

Shell eggs and shell egg products are vulnerable to contamination by pathogens, which are naturally occurring disease-producing organisms such as Salmonella.  Shipment of contaminated products, even if inadvertent, may result in a violation of law and may lead to increased risk of exposure to product liability claims, product recalls and increased scrutiny by federal and state regulatory agencies.  In addition, products purchased from other producers may contain contaminants that may be inadvertently redistributed by us.  As such, we may decide or be required to recall a product if we or regulators believe it poses a potential health risk.  For example, in fiscal 2011, there were two separate occasions where we voluntarily recalled shell eggs that we had purchased from other producers.  None of the recalled eggs were produced at Cal-Maine facilities.  We do not maintain insurance to cover recall losses.  Recall costs in fiscal 2011 were not material, but there is no guarantee that future costs will not be. Any product recall could also result in a loss of consumer confidence in our products, which could adversely affect our reputation with existing and potential customers and have a material adverse effect on our business, results of operations and financial condition.

Our business is highly competitive.

The production and sale of fresh shell eggs, which have accounted for virtually all of our net sales in recent years, is intensely competitive. We compete with a large number of competitors that may prove to be more successful than we are in marketing and selling shell eggs. We cannot provide assurance that we will be able to compete successfully with any or all of these companies. In addition, increased competition could result in price reductions, greater cyclicality, reduced margins and loss of market share, which would negatively affect our business, results of operations and financial condition.
 
Pressure from animal rights groups regarding the treatment of animals may subject us to additional costs to conform our practices to comply with developing standards or subject us to marketing costs to defend challenges to our current practices and protect our image with our customers.

We and many of our customers are facing pressure from animal rights groups, such as People for the Ethical Treatment of Animals, or PETA, and the Humane Society of the United States, to require that any companies that supply food products operate their business in a manner that treats animals in conformity with certain standards developed by these animal rights groups. As a result, we are reviewing and changing our operating procedures with respect to our flock of hens to meet some or all of these treatment standards. The treatment standards require, among other things, that we provide increased cage space for our hens and modify beak trimming and forced molting practices (the act of putting chickens into a regeneration cycle). These groups have made legislative efforts to ban any form of caged housing in various states.  Changing our procedures and infrastructure to conform to these guidelines has resulted and will continue to result in additional costs to our internal production of shell eggs, including cost increases from housing and feeding the increased flock population resulting from the modification of molting practices, and the cost for us to purchase shell eggs from our outside suppliers. While some of these increased costs have been passed on to our customers, we cannot provide assurance that we can continue to pass on these costs, or any additional costs we will face, in the future.

On July 7, 2011, the Humane Society of the United States (“HSUS”) and the United Egg Producers (“UEP”) reached an agreement to work together toward the enactment of comprehensive new federal legislation for all 280 million hens involved in U.S. egg production.  The two groups will jointly ask Congress for federal legislation, which would require egg producers to increase the space per bird in a tiered phase in, with the amount of space birds are given increasing, in intervals, over the next 15 to 18 years. Currently, the majority of birds are each provided 67 square inches of space, with roughly 50 million receiving 48 square inches. The proposed phase-in would culminate with hens nationwide being provided a minimum of 124 - 144 square inches of space, along with certain other improvements noted in the July 7, 2011 agreement.   If this federal legislation is passed we could incur significant costs to conform our operations to meet the requirements of this proposed legislation.   We do not have a current estimate of what these costs will be if this legislation is passed.

 
11

 

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

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

Agricultural risks could harm our business.

Our shell egg production activities are subject to a variety of agricultural risks. Unusual or extreme weather conditions, disease and pests can materially and adversely affect the quality and quantity of shell eggs we produce and distribute. If a substantial portion of our production facilities are affected by any of these factors in any given quarter or year, our business, financial condition and results of operations could be materially and adversely affected.

We are controlled by a principal stockholder.

Fred R. Adams, Jr., our Chairman of the Board, and his spouse own 30.4% of the outstanding shares of our Common Stock, which has one vote per share.  In addition, Mr. Adams owns 74.9% and his son-in-law, Adolphus B. Baker, our President, Chief Executive Officer and Director, owns 25.1% of the outstanding shares of our Class A Common Stock, which has ten votes per share. Mr. Baker and his spouse also own 1.9% of the outstanding shares of our Common Stock. As a result, currently Mr. Adams and his spouse possess 53.8%, and Messrs. Adams and Baker and their spouses collectively possess 67.9%, of the total voting power represented by the outstanding shares of our Common Stock and Class A Common Stock. These stockholdings include shares of our Common Stock accumulated under our employee stock ownership plan for the respective accounts of Messrs. Adams and Baker.

The Adams family intends to retain ownership of a sufficient amount of Common Stock and Class A Common Stock to assure its continued ownership of over 50% of the combined voting power of our outstanding shares of capital stock. Such ownership will make an unsolicited acquisition of us more difficult and discourage certain types of transactions involving a change of control of our company, including transactions in which the holders of Common Stock might otherwise receive a premium for their shares over then current market prices. In addition, certain provisions of our Certificate of Incorporation require that our Class A Common Stock be issued only to Fred R. Adams, Jr. and members of his immediate family, and that if shares of our Class A Common Stock, by operation of law or otherwise, are deemed not to be owned by Mr. Adams or a member of his immediate family, the voting power of any such shares shall be automatically reduced to one vote per share. The Adams family’s controlling ownership of our capital stock may adversely affect the market price of our Common Stock.

Based on Mr. Adams’ beneficial ownership of our outstanding capital stock, we are a “controlled company,” as defined in Rule 5615(c)(1) of the listing standards of the NASDAQ Global Market on which our shares of Common Stock are quoted. Accordingly, we are exempt from certain requirements of NASDAQ’s corporate governance listing standards, including the requirement to maintain a majority of independent directors on our board of directors and the requirements regarding the determination of compensation of executive officers and the nomination of directors by independent directors.

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

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

 
12

 

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

Goodwill represents the excess of the cost of business acquisitions over the fair value of the identifiable net assets acquired.  Goodwill is reviewed for impairment annually or more frequently should certain impairment indicators arise.  As of May 28, 2011, we had $22.1 million of goodwill.  While we believe that the current carrying value of this goodwill is not impaired, any future goodwill impairment charges could materially adversely affect our results of operations in any particular period or our net worth.

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

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

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.
 
ITEM 2.  PROPERTIES

We operate farms, processing plants, hatcheries, feed mills, warehouses, offices and other properties located in Alabama, Arkansas, Florida, Georgia, Kansas, Kentucky, Louisiana, Mississippi, New Mexico, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Texas and Utah. The facilities currently include three breeding facilities, two hatcheries, five wholesale distribution centers, 20 feed mills, 38 shell egg production facilities, 26 pullet growing facilities, and 36 processing and packing facilities.  We also own interests in two egg products facilities, which are consolidated in our financial statements. Most of our operations are conducted from properties we own.
 
Presently, we own approximately 19,700 acres of land in various locations throughout our geographic market area. We have the ability to hatch 21.2 million pullet chicks annually, grow 18 million pullets annually, house 31 million laying hens and control the production of an aggregate total of 30 million layers, with the remainder controlled by contract growers. We also own mills that can produce 700 tons of feed per hour, and processing facilities capable of processing 12,200 cases of shell eggs per hour (with each case containing 30 dozen shell eggs).

Over the past five fiscal years, our capital expenditures, excluding acquisitions of shell egg production and processing facilities from others, have totaled an aggregate amount of approximately $116.4 million.

ITEM 3.  LEGAL PROCEEDINGS

Chicken Litter Litigation

Cal-Maine Farms, Inc. is presently a defendant in two personal injury cases in the Circuit Court of Washington County, Arkansas. Those cases are styled, McWhorter vs. Alpharma, Inc., et al., and Carroll, et al. vs. Alpharma, Inc., et al. Cal-Maine Farms, Inc. was named as a defendant in the McWhorter case on February 3, 2004. It was named as a defendant in the Carroll case on May 2, 2005. Co-defendants in both cases include other integrated poultry companies such as Tyson Foods, Inc., Cargill, Incorporated, George’s Farms, Inc., Peterson Farms, Inc., Simmons Foods, Inc., and Simmons Poultry Farms, Inc. The manufacturers of an additive for broiler feed are also included as defendants. Those defendants are Alpharma, Inc. and Alpharma Animal Health, Co.

Both cases allege that the plaintiffs have suffered medical problems resulting from living near land upon which “litter” from the defendants’ flocks was spread as fertilizer. The McWhorter case focuses on mold and fungi allegedly created by the application of litter, and seeks unspecified damages. The Carroll case also alleges injury from mold and fungi, but focuses primarily on the broiler feed ingredient as the cause of the alleged medical injuries, and seeks unspecified damages. No trial date for either the Carroll or McWhorter case has been set.

 
13

 

Several other separate, but related, cases were prosecuted in the same venue by the same attorneys. The same theories of liability were prosecuted in all of the cases. No Cal-Maine company was named as a defendant in any of those other cases. The plaintiffs selected one of those cases, Green, et al. vs. Alpharma, Inc., et al., as a bellwether case to go to trial first. All of the poultry defendants were granted summary judgment in the Green case in 2006. In 2008, however, the Arkansas Supreme Court reversed the summary judgment in favor of the poultry defendants and remanded the case for trial. The case was retried with a complete defendants’ verdict, and that verdict was upheld by the Arkansas Supreme Court. The plaintiffs’ intentions with regard to the other lawsuits, including McWhorter and Carroll are not presently known. We are not able at present to give an opinion regarding the ultimate resolution of McWhorter and Carroll, but the outlook appears favorable.

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 a number of companies, including Cal-Maine Foods, Inc. and Cal-Maine Farms, Inc. We and Cal-Maine Farms filed our joint answer and motion to dismiss the suit on October 3, 2005. 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 on motion by the Court. The parties participated in a series of mediation meetings without success. Cal-Maine Foods, Inc. no longer operates 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. Cal-Maine Foods, Inc. owns 100% 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 has been conducted. The trial began in September 2009, and concluded in February 2010. The case was tried to the Court without a jury. We are awaiting a ruling from the Court. We are not able at present to give an opinion regarding the ultimate resolution of the action.

Mississippi Wage and Hour Litigation

On August 9, 2010, a former Mississippi employee of Cal-Maine Farms, Inc. filed a wage and hour claim alleging that he was wrongfully denied overtime pay for work in excess of forty hours per week seeking recovery of overtime wages not paid, liquidated damages equal to overtime wages not paid, and attorney’s fees. In its present posture, the case is a single-employee action. The plaintiff has, however, requested that he be considered a representative employee and that the case be expanded to cover all similarly situated employees and former employees.

The controlling statutory and regulatory framework of the Fair Labor Standards Act make it plain that the former employee was an agricultural worker, and that, accordingly, he was not entitled to overtime pay. The case was filed in state court and immediately removed to the U.S. District Court for the Southern District of Mississippi. A Motion to Dismiss has been filed on behalf of Cal-Maine Farms, Inc. The Court has stayed all proceedings in this case pending resolution of that motion. We are not able at present to give an opinion regarding the ultimate resolution of the action.

Egg Antitrust Litigation

Since September 25, 2008, the Company has been named as one of several defendants in twenty-four antitrust cases involving the United States shell egg industry. In sixteen of these cases, the named plaintiffs sued on behalf of themselves and a putative class of others who claim to be similarly situated. In fourteen of those putative class actions, the named plaintiffs allege that they are retailers or distributors that purchased shell eggs and egg products directly from one or more of the defendants. In the other two putative class actions, the named plaintiffs are individuals or companies who allege that they purchased shell eggs and egg products indirectly from one or more of the defendants - that is, they purchased from retailers that had previously purchased from defendants or other parties. In the remaining eight cases, the plaintiffs sued for their own alleged damages and are not seeking to certify a class.
 
The Judicial Panel on Multidistrict Litigation consolidated all of the putative class actions (as well as certain other cases in which the Company was not a named defendant) for pretrial proceedings in the United States District Court for the Eastern District of Pennsylvania. The Pennsylvania court has organized the putative class actions around two groups (direct purchasers and indirect purchasers) and has named interim lead counsel for the named plaintiffs in each group.

 
14

 

Six of the eight non-class suits were filed in the same court that is presiding over the putative class actions. One of these cases was voluntarily dismissed without prejudice by the plaintiff.  Another of these cases was filed in the United States District Court for the Western District of Pennsylvania, but the defendants have transferred it to the Eastern District, and it has been consolidated for pretrial proceedings with the other cases. The remaining non-class suit was filed in the District Court of Wyandotte County, Kansas.  The defendants removed this case to the United States District Court for the District of Kansas and then requested that it be transferred to the Eastern District of Pennsylvania and consolidated with the Multidistrict Litigation proceedings in that court. The Judicial Panel on Multidistrict Litigation granted that transfer request, and the case has now been consolidated in the Eastern District of Pennsylvania.  The plaintiffs in this action have filed a motion to remand the case back to the District Court of Wyandotte County, Kansas, but that motion has not been decided.
 
The Direct Purchaser Putative Class Action. The named plaintiffs in the direct purchaser case filed a consolidated complaint on January 30, 2009. On April 30, 2009, the Company filed motions to dismiss the direct purchasers’ consolidated complaint. The direct purchaser plaintiffs did not respond to those motions. Instead, the direct purchaser plaintiffs announced a potential settlement with one defendant. The final hearing on approval of that settlement has been held, but the court has not yet ruled. If it is approved, the settlement would not require the settling party to pay any money. Instead, the settling defendant, while denying all liability, would provide cooperation in the form of documents and witness interviews to the plaintiffs’ attorneys. After announcing this potential settlement with one defendant, the direct purchaser plaintiffs filed an amended complaint on December 11, 2009. On February 5, 2010, the Company joined with other defendants in moving to dismiss the direct purchaser plaintiffs’ claims for damages outside the four-year statute of limitations period and claims arising from a supposed conspiracy in the egg products sector. The court heard oral argument on these motions but has not yet ruled. On February 26, 2010, the Company filed its answer and affirmative defenses to the direct purchaser plaintiffs’ amended complaint. On June 4, 2010, the direct purchaser plaintiffs announced a potential settlement with a second defendant. The final hearing on approval of this settlement has also been held, but the court has not ruled. If this settlement is approved, then the defendant would pay a total of $25 million and would provide other consideration in the form of documents, witness interviews, and declarations. This settling defendant denied all liability in its potential agreement with the direct purchaser plaintiffs and stated publicly that it settled merely to avoid the cost and uncertainty of continued litigation.
 
The Indirect Purchaser Putative Class Action. The named plaintiffs in the indirect purchaser case filed a consolidated complaint on February 27, 2009. On April 30, 2009, the Company filed motions to dismiss the indirect purchasers’ consolidated complaint. The indirect purchaser plaintiffs did not respond to those motions. Instead, the indirect purchaser plaintiffs filed an amended complaint on April 8, 2010. On May 7, 2010, the Company joined with other defendants in moving to dismiss the indirect purchaser plaintiffs’ claims for damages outside the four-year statute of limitations period, claims arising from a supposed conspiracy in the egg products sector, claims arising under certain state antitrust and consumer frauds statutes, and common-law claims for unjust enrichment. The court heard oral argument on these motions but has not yet ruled. On June 4, 2010, the Company filed its answer and affirmative defenses to the indirect purchaser plaintiffs’ amended complaint.
 
The Non-Class Cases. The cases in which plaintiffs do not seek to certify a class were filed between November 16, 2010 and January 25, 2011. The Company has not yet answered or moved to dismiss any of these cases.
 
Allegations in Each Case. In all of the cases described above, the plaintiffs allege that the Company and certain other large domestic egg producers conspired to reduce the domestic supply of eggs in a concerted effort to raise the price of eggs to artificially high levels. In each case, plaintiffs allege that all defendants agreed to reduce the domestic supply of eggs by (a) manipulating egg exports and (b) implementing industry-wide animal welfare guidelines that reduced the number of hens and eggs.
 
Both groups of named plaintiffs in the putative class actions seek treble damages and injunctive relief on behalf of themselves and all other putative class members in the United States. Both groups of named plaintiffs in the putative class actions allege a class period starting on January 1, 2000 and running “through the present.” The direct purchaser putative class action case alleges two separate sub-classes – one for direct purchasers of shell eggs and one for direct purchasers of egg products. The direct purchaser putative class action case seeks relief under the Sherman Act. The indirect purchaser putative class action case seeks relief under the Sherman Act and the statutes and common-law of various states, the District of Columbia, and Puerto Rico.
 
In six of the non-class cases, the plaintiffs seek damages and injunctive relief under the Sherman Act. In one of the non-class cases, the plaintiff seeks damages and injunctive relief under the Sherman Act and the Ohio antitrust act (known as the Valentine Act). In the remaining non-class case, the plaintiffs seek damages and injunctive relief under the Kansas Restraint of Trade Act.

 
15

 

The Pennsylvania court has entered a series of orders in the putative class actions related to case management and scheduling. There is no definite schedule in either putative class action case for discovery, class certification proceedings, or filing motions for summary judgment. No trial date has been set in either putative class action case. The non-class cases were filed so recently that the court has not set any schedule for them.
 
The Company intends to continue to defend these cases as vigorously as possible based on defenses which the Company believes are meritorious and provable.
 
Florida civil investigative demand
 
On November 4, 2008, the Company received an antitrust civil investigative demand from the Attorney General of the State of Florida. The demand seeks production of documents and responses to interrogatories relating to the production and sale of eggs and egg products. The Company is cooperating with this investigation and expects to provide responsive information. No allegations of wrongdoing have been made against the Company in this matter.

ITEM 4. (REMOVED AND RESERVED)

 
16

 

PART II.

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

Our Common Stock is traded on the NASDAQ Global Market under the symbol “CALM”.  The last reported sale price for our Common Stock on July 28, 2011 was $34.60 per share. The following table sets forth the high and low daily sale prices and dividends per share for four quarters of fiscal 2010 and fiscal 2011.

       
Sales Price
   
Dividends
 
Fiscal Year Ended
 
Fiscal Quarter
 
High
   
Low
       
                       
May 29, 2010
 
First Quarter
  $ 31.68     $ 22.76     $ 0.000  
   
Second Quarter
    29.42       24.90       0.172  
   
Third Quarter
    36.35       27.07       0.483  
   
Fourth Quarter
    38.88       30.60       0.294  
                             
May 28, 2011
 
First Quarter
  $ 34.95     $ 28.68     $ 0.067  
   
Second Quarter
    32.15       26.23       0.212  
   
Third Quarter
    34.16       27.71       0.470  
   
Fourth Quarter
    30.43       27.20       0.102  

There is no public trading market for the Class A Common Stock, all the outstanding shares of which are owned by Fred R. Adams, Jr., Chairman of the Board of Directors (74.9%), and his son-in-law Adolphus Baker, President, Chief Executive Officer and Director of the Company (25.1%).

Stockholders

At July 18, 2011, there were approximately 282 record holders of our Common Stock and approximately 12,700 beneficial owners whose shares were held by nominees or broker dealers.

Dividends

Cal-Maine pays a dividend to shareholders of its Common Stock and Class A Common Stock on a quarterly basis for each quarter for which the Company reports net income computed in accordance with generally accepted accounting principles in an amount equal to one-third (1/3) of such quarterly income. Dividends are paid to shareholders of record as of the 60th day following the last day of such quarter, except for the fourth fiscal quarter,  For the fourth quarter, the Company will pay dividends to shareholders of record on the 70th 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, the Company will not pay a dividend for a subsequent profitable quarter until the Company is profitable on a cumulative basis computed from the date of the last quarter for which a dividend was paid.

Recent Sales of Unregistered Securities

No sales of securities without registration under the Securities Act of 1933 occurred during our fiscal year ended May 28, 2011.

 
17

 

ITEM 6.  SELECTED FINANCIAL DATA

   
Fiscal Years Ended
 
   
May 28
   
May 29
   
May 30
   
May 31
   
June 2
 
   
2011
   
2010
   
2009 **
   
2008
    2007 **  
   
52 wks
   
52 wks
   
52 wks
   
52 wks
   
52 wks
 
Statement of Operations Data:
                               
Net sales 
  $ 941,981     $ 910,143     $ 928,812     $ 915,939     $ 598,128  
Cost of sales 
    757,050       715,499       724,085       617,383       479,504  
Gross profit 
    184,931       194,644       204,727       298,556       118,624  
Selling, general and administrative 
    101,448       92,040       83,253       74,919       60,394  
Operating income
    83,483       102,604       121,474       223,637       58,230  
Other income (expense): 
                                       
Interest expense (excluding: non cash interest expense, early extinguishment of debt  - includes: interest  income)
    (6,022 )     (6,640 )     (4,565 )     (3,152 )     (4,993 )
Interest expense - non cash 
          (88 )     (477 )     (942 )     (882 )
Loss on early extinguishment of debt
    (2,648 )                        
Equity in income of affiliates 
    4,701       3,507       2,612       6,324       1,699  
Gain on sale of stock in Eggland’s BestTM
    4,829                          
Other, net
    7,328       4,110       2,290       5,699       1,921  
      8,188       889       (140 )     7,929       (2,255 )
Income (loss) before income tax and noncontrolling interest 
    91,671       103,493       121,334       231,566       55,975  
Income tax expense (benefit) 
    33,403       37,961       41,510       79,530       19,605  
Net income including noncontrolling interest
    58,268       65,532       79,824       152,036       36,370  
Less: Net income (loss) attributable to noncontrolling interest
    (2,571 )     (2,291 )     324       175       (286 )
Net income (loss) attributable to Cal-Maine Foods, Inc.
  $ 60,839     $ 67,823     $ 79,500     $ 151,861     $ 36,656  
Net income (loss) per common share: 
                                       
Basic 
  $ 2.55     $ 2.85     $ 3.34     $ 6.41     $ 1.56  
Diluted 
  $ 2.54     $ 2.84     $ 3.34     $ 6.40     $ 1.55  
                                         
Cash dividends per common share * 
  $ 0.85     $ 0.95     $ 1.11     $ 1.34     $ 0.05  
                                         
Weighted average shares outstanding: 
                                       
Basic 
    23,855       23,812       23,769       23,677       23,526  
Diluted 
    23,942       23,877       23,811       23,733       23,599  
Balance Sheet Data:
                                       
Working capital 
  $ 247,559     $ 220,186     $ 137,999     $ 121,550     $ 80,552  
Total assets 
    640,843       631,284       582,845       501,236       364,568  
Total debt (including current maturities) 
    88,161       134,673       129,789       97,150       112,852  
Total stockholders’ equity 
    418,877       376,956       333,009       277,367       157,633  
                                         
Operating Data:
                                       
Total number of layers at
                                       
period ended (thousands) 
    26,819       26,326       27,022       21,853       23,181  
Total shell eggs sold (millions of dozens) 
    821.4       805.4       777.9       678.5       685.5  
 

*
Effective October 2, 2008, our Class A Common Stock is paid a dividend rate equal to the rate on our Common Stock.  Prior to that date, Class A shares were paid at 95% of the Common Stock dividend rate.
 
**
Results for fiscal 2007 include the results of operations of Green Forest Foods, LLC which was consolidated with our operations as of January 24, 2007, and Benton County Foods, LLC, which was consolidated with our operations as of April 20, 2007.  Results for fiscal 2009 include the results of operations of Zephyr Egg, LLC, which was consolidated with our operations as of June 27, 2008, and Tampa Farms, LLC, which was consolidated with our operations as of December 11, 2008.  See Note 2 to the Consolidated Financial Statements included in this Annual Report for a description of these acquisitions in fiscal 2007 and 2009.

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

Risk Factors; Forward-Looking Statements

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

Overview

Cal-Maine Foods, Inc. (“we,” “us,” “our,” or the “Company”) is primarily engaged in the production, grading, packaging, marketing and distribution of fresh shell eggs. Our fiscal year end is the Saturday nearest to May 31 which was May 28, 2011 (52 weeks), May 29, 2010 (52 weeks), and May 30, 2009 (52 weeks) for the most recent three fiscal years.

Our operations are fully integrated. At our facilities we hatch chicks, grow and maintain flocks of pullets (young female chickens, usually under 20 weeks of age), layers (mature female chickens) and breeders (male or female birds used to produce fertile eggs to be hatched for egg production flocks), manufacture feed, and produce, process and distribute shell eggs and egg products. We are the largest producer and marketer of shell eggs in the United States. We market the majority of our shell eggs in 29 states, primarily in the southwestern, southeastern, mid-western, and mid-Atlantic regions of the United States. We market our shell eggs through our extensive distribution network to a diverse group of customers, including national and regional grocery store chains, club stores, foodservice distributors, and egg product manufacturers.

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

For fiscal 2011, we used contract producers for approximately 8% of our total egg production.  Contract producers operate under agreements with us for the use of their facilities in the production of shell eggs by layers owned by us. We own the shell eggs produced under these arrangements. For fiscal 2011, approximately 23% of the total number of shell eggs sold by us was purchased from outside producers for resale.

Our cost of production is materially affected by feed costs.  For fiscal 2011, feed costs averaged about 64% of our total farm egg production cost. Changes in market prices for corn and soybean meal, the primary ingredients of the feed we use, result in changes in our cost of goods sold. The cost of our feed ingredients, which are commodities, are subject to factors over which we have little or no control such as volatile price changes caused by weather, size of harvest, transportation and storage costs, demand and the agricultural and energy policies of the United States and foreign governments. The corn and soybean crops were large for the 2010 crop year; however, national inventories of both commodities are expected to be at very low levels as the crop year comes to a close. Feed ingredient prices have continued to increase sharply since July 2010. Market prices for corn have risen, in part, due to increases in export demand and increases in demand from ethanol producers. Market prices for soybean meal remain high because of competition for planted acres for other grain production. The prospective outlook is for feed costs to remain high and increasingly volatile in the year ahead.

 
19

 

The purchase of Tampa Farms, LLC described in Note 2 in the notes to the consolidated financial statements is referred to below as the “Acquisition.”  To increase comparability in the results of operations comparison between fiscal 2010 and fiscal 2009, the exclusion of the Acquisition refers to the exclusion of the fiscal 2010 first and second quarter results of operations for Tampa Farms, LLC, because Tampa Farms, LLC was not acquired until the third quarter of fiscal 2009. We also acquired Zephyr Egg, LLC during the first quarter of fiscal 2009, which is described in Note 2 in the notes to the consolidated financial statements.  However, since Zephyr Egg, LLC’s results of operations are included in all four quarters of fiscal 2009 and fiscal 2010, there was no adjustment necessary in the results of operations comparisons for these periods for that acquisition.

RESULTS OF OPERATIONS

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

   
Percentage of Net Sales
Fiscal Years Ended
 
   
May 28, 2011
   
May 29, 2010
   
May 30, 2009
 
                   
Net sales
    100.0 %     100.0 %     100.0 %
Cost of sales
    80.4       78.6       78.0  
Gross profit
    19.6       21.4       22.0  
Selling, general & administrative expenses
    10.8       10.1       8.9  
Operating income
    8.8       11.3       13.1  
Other income (expense)
    0.9       0.1       (0.0 )
Income before taxes
    9.7       11.4       13.1  
Income tax expense
    3.5       4.2       4.5  
Net income including noncontrolling interests
    6.2       7.2       8.6  
Less: Net income (loss) attributable to noncontrolling interests
    (0.3 )     (0.3 )     0.1  
Net income attributable to Cal-Maine Foods, Inc
    6.5 %     7.5 %     8.5 %

Executive Overview of Results – May 28, 2011, May 29, 2010, and May 30, 2009

Our operating results are significantly affected by wholesale shell egg market prices and feed costs, which can fluctuate widely and are outside of our control.  Primarily, our shell eggs are sold at prices related to the Urner Barry Spot Egg Market Quotations for the southeastern region of the country.  The following table shows our net income (loss), net average shell egg selling price, feed cost per dozen produced, and the average Urner Barry wholesale large shell egg prices in the southeast region, for each of our three most recent fiscal years.

Fiscal Year ended
 
May 28, 2011
   
May 29, 2010
   
May 30, 2009
 
                   
Net income attributable to Cal-Maine Foods, Inc. - (in thousands)
  $ 60,839     $ 67,823     $ 79,500  
                         
Net average shell egg selling price
  $ 1.10     $ 1.08     $ 1.14  
                         
Feed cost per dozen produced
  $ .394     $ .349     $ .391  
                         
Average Urner Barry Spot Egg Market Quotations1
  $ 1.13     $ 1.12     $ 1.21  
 
 
1-
Average daily price for the large market (i.e. generic shell egg) in the southeastern region
 
The shell egg industry has traditionally been subject to periods of high profitability followed by periods of significant loss. The periods of high profitability reflect increased consumer demand relative to supply while the periods of significant loss reflect excess supply for the then prevailing consumer demand.  Historically, demand for shell eggs increases in line with overall population growth. As reflected above, our operating results correspond with changes in the spot egg market quote.   The net average shell egg selling price is the blended price for all sizes and grades of shell eggs, including non-graded shell egg sales, breaking stock and undergrades.  In fiscal 2003 and 2004, shell egg demand increased at higher than normal trend rates due to the increased popularity of high protein diets.  This demand imbalance caused shell egg prices to increase.  In late fiscal 2004, the popularity of these high protein diets began to diminish, but our egg production had been increased to meet the earlier higher demand levels.  Lower egg prices followed, and we experienced net losses in fiscal 2005 and 2006.  Beginning in the latter part of fiscal 2006, egg supplies appeared to become more aligned with demand. Since that time, the supply-demand balance has tightened.  Tighter supplies resulted in increased prices in fiscal 2007, and prices reached record levels in fiscal 2008.  These increased prices resulted in significantly improved profitability.  In fiscal 2009, egg prices declined as compared to fiscal 2008, due to slight increases in supply.  In fiscal 2010, egg prices continued to decline as compared to fiscal 2009, due to continued increases in industry supply.  Egg sales at the retail level were good, and while there was modest improvement in food service and restaurant sales, overall there is continued weakness in food service and restaurant sales.   For fiscal 2010, our feed costs decreased, as compared to feed costs in fiscal 2009.  For fiscal 2011, our net average selling price increased slightly, but due to higher feed costs our net income decreased.

 
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Fiscal Year Ended May 28, 2011 Compared to Fiscal Year Ended May 29, 2010

Net Sales.  In fiscal 2011, approximately 96% of our net sales consisted of shell egg sales and approximately 3% was for sales of egg products, with the 1% balance consisting of sales of incidental feed and feed ingredients. Net sales for the fiscal year ended May 28, 2011 were $942.0 million, an increase of $31.8 million, or 3.5%, from net sales of $910.1 million for fiscal 2010.  In fiscal 2011 total dozens of eggs sold increased and egg selling prices increased as compared to fiscal 2010. In fiscal 2011 total dozens of shell eggs sold were 821.4 million, an increase of 16.0 million dozen, or 2.0%, compared to 805.4 million sold in fiscal 2010. Our average selling price of shell eggs increased from $1.079 per dozen for fiscal 2010 to $1.098  per dozen for fiscal 2011, an increase of $0.019 per dozen, or 1.8%.  Our net average shell egg selling price is the blended price for all sizes and grades of shell eggs, including non-graded shell egg sales, breaking stock and undergrades.  Our operating results are significantly affected by wholesale shell egg market prices, which are outside of our control. Small changes in production or demand levels can have a large effect on shell egg prices.

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

   
Fiscal Years Ended
(52 weeks)
   
Quarter Ended
(13 weeks)
 
   
May 28, 2011
   
May 29, 2010
   
May 28, 2011
   
May 29, 2010
 
   
(Amounts in thousands)
   
(Amounts in thousands)
 
Total net sales
  $ 941,981     $ 910,143     $ 242,381     $ 222,088  
                                 
Non-specialty shell egg sales
    684,470       682,601       174,846       163,941  
Specialty shell egg sales
    217,766       186,507       56,923       48,110  
Other
    3,501       2,605       950       601  
Net shell egg sales
  $ 905,737     $ 871,713     $ 232,719     $ 212,652  
                                 
Net shell egg sales as a percent of total net sales
    96 %     96 %     96 %     96 %
                                 
Non- specialty shell egg dozens sold
    689,045       689,316       172,145       165,216  
Specialty shell egg dozens sold
    132,375       116,083       34,018       29,964  
Total dozens sold
    821,420       805,399       206,163       195,180  

Our non-specialty shell eggs include all shell egg sales not specifically identified as specialty shell egg sales.   The non-specialty shell egg market is characterized by an inelasticity of demand, and small increases in production or decreases in demand can have a large adverse effect on prices and vice-versa.  In fiscal 2011, non-specialty shell eggs represented approximately 75.6% of our shell egg dollar sales, as compared to 78.3% for fiscal 2010.   Sales of non-specialty shell eggs accounted for approximately 83.9% of our total shell egg dozen volumes in fiscal 2011, as compared to 85.6% in fiscal 2010.

For the thirteen-week period ended May 28, 2011, non-specialty shell eggs represented approximately 75.1% of our shell egg dollar sales, as compared to 77.1% for the thirteen-week period ended May 29, 2010.   For the thirteen-week period ended May 28, 2011, non-specialty shell eggs accounted for approximately 83.5% of the total shell egg dozen volume, as compared to 84.6% for the thirteen-week period ended May 29, 2010.

We continue to increase our sales volume of specialty eggs, which include nutritionally enhanced, cage free and organic eggs.  Specialty egg retail prices are less cyclical than non-specialty shell egg prices and are generally higher due to consumer willingness to pay for the increased benefits from these products.   For fiscal 2011, specialty eggs accounted for 24.0% of shell egg dollar sales, as compared to 21.4% in fiscal 2010, and 16.1% of shell egg dozens sold in fiscal 2011, as compared to 14.4% in fiscal 2010.  They are a growing part of the shell egg market.  Due to healthier eating trends, the volume of specialty eggs continues to increase.   From fiscal 2010 to fiscal 2011, the volume of specialty eggs sold increased by 14.0%.

 
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For the thirteen-week period ended May 28, 2011, specialty shell eggs represented approximately 24.5% of our shell egg dollar sales, as compared to 22.6% for the thirteen-week period ended May 29, 2010.   For the thirteen-week period ended May 28, 2011, specialty shell eggs accounted for approximately 16.5% of the total shell egg dozen volume, as compared to 15.4% for the thirteen-week period ended May 29, 2010.

The shell egg sales classified as “Other” represent sales of hard cooked eggs, hatching eggs, and baby chicks, which are included with our shell egg operations.

Egg products are shell eggs that are broken and sold in liquid, frozen, or dried form.  For fiscal 2011 our egg product sales were $26.9 million, a decrease of $500,000 or 1.8%, as compared to $27.4 million for fiscal 2010.  Our volume of egg products sold for fiscal 2011 was 53.8 million pounds, a decrease of 5.7 million pounds or 9.6%, as compared to 59.5 million pounds for fiscal 2010.  This decrease is due to reduced production at our American Egg Products facility from reduced levels of shell eggs provided to American Egg Products from the Company’s shell egg operations. Egg products are primarily sold into the institutional and food service sectors, which continue to have weak demand.  In fiscal 2011, the price per pound of egg products sold was $0.500 as compared to $0.461 for fiscal 2010, which is an increase of 8.6%.  Prices received for our egg products increased in the most recent fiscal year due to a favorable change in the mix of products sold.   Our egg products are sold through American Egg Products, LLC (“AEP”) and Texas Egg Products, LLC (“TEP”).  For fiscal 2011, egg product sales for AEP were $13.6 million, as compared to $15.5 million for fiscal 2010, a decrease of $1.9 million, or 12.3%.  For AEP the volume of egg products sold for fiscal 2011 was 28.2 million pounds, a decrease of 7.0 million pounds, or 19.9%, as compared to 35.2 million pounds for fiscal 2010. The egg product sales for TEP in fiscal 2011 were $13.4 million, as compared to $11.9 million for fiscal 2010, an increase of $1.5 million or 12.5%. For TEP the volume of egg products sold for fiscal 2011 was 25.6 million pounds, an increase of 1.3 million pounds, or 5.4%, as compared to 24.3 million pounds for fiscal 2010.   As described in Note 1 in the notes to the consolidated financial statements, TEP is a variable interest entity of which the Company is the primary beneficiary.

 
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Cost of Sales

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

   
Fiscal Years Ended
(52 weeks)
   
Quarter Ended
(13 weeks)
 
(Amounts in thousands)
 
May 28, 2011**
   
May 29, 2010
   
May 28, 2011***
   
May 29, 2010
 
Cost of Sales:
                       
Farm production
  $ 381,386     $ 362,338     $ 103,449     $ 86,464  
Processing and packaging
    114,868       110,885       28,866       27,004  
Outside egg purchases
    207,089       192,818       54,416       44,923  
Other costs
    28,575       23,424       7,842       2,838  
Total shell eggs
  $ 731,918     $ 689,465     $ 194,573     $ 161,229  
Egg products
    22,375       24,177       6,332       5,880  
Other
    2,757       1,857       76       303  
Total
  $ 757,050     $ 715,499     $ 200,981     $ 167,412  
                                 
Farm production cost (cost per dozen produced)
                         
Feed
  $ 0.394     $ 0.349     $ 0.447     $ 0.327  
Other
    0.221       0.217       0.226       0.223  
Total
  $ 0.615     $ 0.566     $ 0.673     $ 0.550  
                                 
Outside egg purchases (average cost per dozen)
  $ 1.105     $ 1.167     $ 1.121     $ 1.183  
                                 
Dozen Produced
    634,009       640,174       157,621       157,207  
Dozen Purchased*
    187,411       165,225       48,542       37,973  
Dozen Sold
    821,420       805,399       206,163       195,180  

*
Net of processing loss and inventory adjustments

**
Cost of sales for fiscal 2011 was reduced by $6.1 million for proceeds received under our business interruption coverage related to the Farwell, Texas fire in (See Note 7 in the notes to consolidated financial statements)

***
Cost of sales for the thirteen-week period ending May 28, 2011 was reduced by $2.1 million for proceeds received under our business interruption coverage related to the finalization of the Farwell, Texas fire insurance claim in the fourth quarter of fiscal 2011.

Cost of sales for the fiscal year ended May 28, 2011 was $757.1 million, an increase of $41.6 million, or 5.8%, as compared to cost of sales of $715.5 million for fiscal 2010. On a comparable basis, dozens produced decreased, dozens purchased from outside shell egg producers increased and cost of feed ingredients increased in fiscal 2011. Although the cost per dozen for outside egg purchases declined, the cost of shell eggs purchased from outside producers increased due to the increased volume of shell eggs purchased.   This fiscal year we produced 77% of the eggs sold by us, as compared to 79% for the previous year. Feed cost for fiscal 2011 was $.394 per dozen, compared to $.349 per dozen for the prior fiscal year, an increase of 12.9%.  Gross profit decreased from 21.4% of net sales for fiscal 2010 to 19.6% of net sales for fiscal 2011.

Cost of sales for the thirteen-week period ended May 28, 2011 was $201.0 million, an increase of $33.6 million, or 20.1%, as compared to cost of sales of $167.4 million for the thirteen-week period ended May 29, 2010.

 
23

 

Selling, General and Administrative Expenses.

   
Fiscal Years Ended
(52 weeks)
 
   
May 28, 2011
   
May 29, 2010
   
Change
 
Category
 
(Amounts in thousands)
 
Stock compensation expense
  $ (151 )   $ 2,186     $ (2,337 )
Specialty egg expenses
    28,736       21,362       7,374  
Payroll and overhead
    22,059       19,927       2,132  
Other expenses
    19,109       20,055       (946 )
Delivery expense
    31,695       28,510       3,185  
Total
  $ 101,448     $ 92,040     $ 9,408  

Selling, general and administrative expenses include costs of marketing, distribution, accounting and corporate overhead.  Selling, general and administrative expense was $101.4 million in fiscal 2011, an increase of $9.4 million or 10.2%, as compared to $92.0 million for fiscal 2010. Stock based compensation plan expense decreased $2.3 million for the current fiscal year. The calculation of stock based compensation plan expense is dependent on the closing stock price of the Company’s Common Stock. From the fiscal year ended May 30, 2009 to May 29, 2010, the Common Stock price increased from $24.37 at May 30, 2009 to $32.37 at May 29, 2010, which is a 32.8% increase. From the fiscal year ended May 29, 2010 to May 28, 2011, the Common Stock price decreased from $32.37 at May 29, 2010 to $28.93 at May 28, 2011, which is a 10.6% decrease.   Specialty egg expenses represent advertising, commissions, royalties, and franchise fees as they are incurred with sales of our specialty eggs.  The expense increase is attributable to the increase in the dozens of specialty eggs sold this year as compared to last fiscal year as well as increased promotional activities. Payroll and overhead increased as compared to the same period the prior year due to higher performance based bonuses paid in the current year.  Other selling, general and administrative expenses decreased due to decreases in legal, audit, and general insurance expenses. Delivery expense increased due to higher fuel costs and increased costs for the use of outside trucking. As a percent of net sales, selling, general and administrative expense increased from 10.1% for fiscal 2010 to 10.8% for fiscal 2011.

   
Fiscal Years Ended
(13 weeks)
 
   
May 28, 2011
   
May 29, 2010
   
Change
 
Category
 
(Amounts in thousands)
 
Stock compensation expense
  $ 156     $ 170     $ (14 )
Specialty egg expenses
    8,207       5,228       2,979  
Payroll and overhead
    6,240       5,426       814  
Other expenses
    4,578       4,253       325  
Delivery expense
    8,521       7,066       1,455  
Total
  $ 27,702     $ 22,143     $ 5,559  

Selling, general and administrative expense was $27.7 million for the thirteen-week period ended May 28, 2011, an increase of $5.6 million or 25.1%, as compared to $22.1 million for the thirteen-week period ending May 29, 2010.

Operating Income.   As a result of the above, our operating income was $83.5 million for fiscal 2011, as compared to operating income of $102.6 million for fiscal 2010.  Operating income as a percent of sales for fiscal 2011 was 8.8%, as compared to operating income of 11.3% for fiscal 2010.

Other Income (Expense). Other income or expense consists of income or costs not directly charged or related to operations such as equity in income of affiliates and interest expense. Other income for fiscal 2011 was $8.2 million as compared to other income of $889,000 for fiscal 2010. Net interest expense decreased by $706,000 as compared to last fiscal year.  We recorded a loss of $2.6 million on the early extinguishment of debt with John Hancock Life Insurance Company in fiscal 2011.   Rates earned on invested cash balances were lower in the current year.  In fiscal 2011, we recorded patronage refunds and dividends from Eggland’s BestTM (“EB”), a marketing cooperative, for $5.3 million, as compared to $3.3 million in fiscal 2010. In addition to the patronage refund and dividend, we recorded a gain of $4.8 million from the sale of non-voting stock in EB. We account for our investment in EB on the cost method. Our equity in income of affiliates increased due to similar amounts being paid by EB to Specialty Eggs, LLC, an affiliated entity which is also a franchisee and cooperative owner of EB. Our ownership interest in Specialty Eggs, LLC is 50%. We account for our investment in Specialty Eggs, LLC using the equity method. Specialty Eggs, LLC received dividends and patronage refunds of $1.2 million, as compared to $769,000 in the prior year, and it also recognized a gain of $1.6 million from the sale of non-voting stock in EB. Our one-half portion of the amounts received by Specialty Eggs, LLC from EB is $1.4 million. In fiscal 2011, we finalized our insurance claim on the Farwell, Texas fire and recorded a gain of $1.8 million on the fixed assets that were destroyed in this fire. As a percent of net sales, other income was 0.9% for fiscal 2011, as compared to other income of 0.1% for fiscal 2010.

 
24

 

Income Taxes.   For the fiscal year ended May 28, 2011, our pre-tax income was $91.7 million, as compared to $103.5 million for fiscal 2010.  Income tax expense of $33.4 million was recorded for fiscal 2011 with an effective income tax rate of 36.4%, as compared to $38.0 million for fiscal 2010 with an effective income tax rate of 36.7%.

Our effective rate differs from the federal statutory income tax rate of 35% due to state income taxes and certain items included in income or loss for financial reporting purposes that are not included in taxable income or loss for income tax purposes, including tax exempt interest income, the domestic manufacturers deduction, and net income or loss attributable to noncontrolling interest.

Net loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest for fiscal 2011 was $2.6 million as compared to net loss attributable to noncontrolling interest of $2.3 million for fiscal 2010.

Net Income.  As a result of the above, net income for fiscal 2011 was $60.8 million, or $2.55 per basic share and $2.54 per diluted share, as compared to $67.8 million, or $2.85 per basic share and $2.84 per diluted share for fiscal 2010.

Fiscal Year Ended May 29, 2010 Compared to Fiscal Year Ended May 30, 2009

Net Sales.  In fiscal 2010, approximately 96% of our net sales consisted of shell egg sales and approximately 3% was for sales of egg products, with the 1% balance consisting of sales of incidental feed and feed ingredients. Net sales for the fiscal year ended May 29, 2010 were $910.1 million, a decrease of $18.7 million, or 2.0%, from net sales of $928.8 million for fiscal 2009.  In fiscal 2010 total dozens of eggs sold increased and egg selling prices decreased as compared to fiscal 2009. In fiscal 2010 total dozens of shell eggs sold were 805.4 million, an increase of 27.5 million dozen, or 3.5%, compared to 777.9 million sold in fiscal 2009. Our average selling price of shell eggs decreased from $1.136 per dozen for fiscal 2009 to $1.079 per dozen for fiscal 2010, a decrease of $.057 per dozen, or 5.0%.  Our net average shell egg selling price is the blended price for all sizes and grades of shell eggs, including non-graded shell egg sales, breaking stock and undergrades.  Our operating results are significantly affected by wholesale shell egg market prices, which are outside of our control. Small changes in production or demand levels can have a large effect on shell egg prices.

On a comparable basis, excluding the Acquisition, net sales for fiscal 2010 were $865.6 million, a decrease of $63.2 million, or 6.8%, as compared to net sales of $928.8 million for fiscal 2009.   Dozens sold for fiscal 2010, excluding the Acquisition, were 764.3 million, a decrease of 13.6 million, or 1.7% as compared to 777.9 million for fiscal 2009.

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

   
Fiscal Years Ended
(52 weeks)
   
Quarter Ended
(13 weeks)
 
   
May 29, 2010
   
May 30, 2009
   
May 29, 2010
   
May 30, 2009
 
   
(Amounts in thousands)
   
(Amounts in thousands)
 
Total net sales
  $ 910,143     $ 928,812     $ 222,088     $ 213,601  
                                 
Non-specialty shell egg sales
    682,601       714,836       163,941       161,595  
Specialty shell egg sales
    186,507       168,785       48,110       43,124  
Other
    2,605       3,841       601       1,019  
Net shell egg sales
  $ 871,713     $ 887,462     $ 212,652     $ 205,738  
                                 
Net shell egg sales as a
                               
percent of total net sales
    96 %     95 %     96 %     96 %
                                 
Non- specialty shell egg dozens sold
    689,316       670,860       165,216       178,260  
Specialty shell egg dozens sold
    116,083       107,025       29,964       26,997  
Total dozens sold
    805,399       777,885       195,180       205,257  

Our non-specialty shell eggs include all shell egg sales not specifically identified as specialty shell egg sales.   The non-specialty shell egg market is characterized by an inelasticity of demand, and small increases in production or decreases in demand can have a large adverse effect on prices and vice-versa.  In fiscal 2010, non-specialty shell eggs represented approximately 78.3% of our shell egg dollar sales, as compared to 80.5% for fiscal 2009.   Sales of non-specialty shell eggs accounted for approximately 85.6% of our total shell egg dozen volumes in fiscal 2010, as compared to 86.2% in fiscal 2009.

 
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For the thirteen-week period ended May 29, 2010, non-specialty shell eggs represented approximately 77.1% of our shell egg dollar sales, as compared to 78.5% for the thirteen-week period ended May 30, 2009.   For the thirteen-week period ended May 29, 2010, non-specialty shell eggs accounted for approximately 84.6% of the total shell egg dozen volume, as compared to 86.8% for the thirteen-week period ended May 30, 2009.

We continue to increase our sales volume of specialty eggs, which include nutritionally enhanced, cage free and organic eggs.  Specialty egg retail prices are less cyclical than non-specialty shell egg prices and are generally higher due to consumer willingness to pay for the increased benefits from these products.   For fiscal 2010, specialty eggs accounted for 21.4% of shell egg dollar sales, as compared to 19.0% in fiscal 2009, and 14.4% of shell egg dozens sold in fiscal 2010, as compared to 13.8% in fiscal 2009.  They are a rapidly growing part of the shell egg market.  Due to healthier eating trends, the volume of specialty eggs continues to increase.   From fiscal 2009 to fiscal 2010, the volume of specialty eggs sold increased by 8.5%.

For the thirteen-week period ended May 29, 2010, specialty shell eggs represented approximately 22.6% of our shell egg dollar sales, as compared to 21.0% for the thirteen-week period ended May 30, 2009.   For the thirteen-week period ended May 29, 2010, specialty shell eggs accounted for approximately 15.4% of the total shell egg dozen volume, as compared to 13.2% for the thirteen-week period ended May 30, 2009.

The shell egg sales classified as “Other” represent sales of hard cooked eggs, hatching eggs, and baby chicks, which are included with our shell egg operations.

Egg products are shell eggs that are broken and sold in liquid, frozen, or dried form.  For fiscal 2010 our egg product sales were $27.4 million, a decrease of $6.5 million or 19.2%, as compared to $33.9 million for fiscal 2009.  Our volume of egg products sold for fiscal 2010 was 59.5 million pounds, an increase of 2.1 million pounds or 3.7%, as compared to 57.4 million pounds for fiscal 2009.  In fiscal 2010, the price per pound of egg products sold was $0.461 as compared to $0.591 for fiscal 2009, which is a decrease of 22.0%.  Egg products are primarily sold into the institutional and food service sectors, which continue to have weak demand. This led to significant declines in the wholesale price of the three primary forms of egg products that we sell. Our egg products are sold through AEP and TEP.  For fiscal 2010, egg product sales for AEP were $15.5 million, as compared to $19.6 million for fiscal 2009, a decrease of $4.1 million, or 20.9%.  For AEP the volume of egg products sold for fiscal 2010 was 35.2 million pounds, an increase of 1.2 million pounds, or 3.5%, as compared to 34.0 million pounds for fiscal 2009. The egg product sales for TEP in fiscal 2010 were $11.9 million, as compared to $14.3 million for fiscal 2009, a decrease of $2.4 million or 16.8%. For TEP the volume of egg products sold for fiscal 2010 was 24.3 million pounds, an increase of 900,000 pounds, or 3.8%, as compared to 23.4 million pounds for fiscal 2009.   As described in Note 1 to the consolidated financial statements, TEP is a variable interest entity of which the Company is the primary beneficiary.

 
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Cost of Sales

Cost of sales consists of costs directly related to production, processing and packing shell eggs, purchases of shell eggs from outside producers, processing and packing of liquid and frozen egg products and other non-egg costs.  Farm production costs are those costs incurred at the egg production facility, including feed, facility, hen amortization, and other related farm production costs.

The following table presents the key variables affecting our cost of sales.

   
Fiscal Years Ended
(52 weeks)
   
Quarter Ended
(13 weeks)
 
(Amounts in thousands)
 
May 29, 2010
   
May 30, 2009
   
May 29, 2010
   
May 30, 2009
 
Cost of Sales:
                       
Farm production
  $ 362,338     $ 364,208     $ 86,464     $ 95,522  
Processing and packaging
    110,885       103,151       27,004       27,566  
Outside egg purchases
    192,818       200,345       44,923       43,733  
Other costs
    23,424       24,579       2,838       3,112  
Total shell eggs
  $ 689,465     $ 692,283     $ 161,229     $ 169,933  
Egg products
    24,177       29,689       5,880       5,353  
Other
    1,857       2,113       303       408  
Total
  $ 715,499     $ 724,085     $ 167,412     $ 175,694  
                                 
Farm production cost (cost per dozen produced)
                         
Feed
  $ 0.349     $ 0.391     $ 0.327     $ 0.376  
Other
    0.217       0.218       0.223       0.217  
Total
  $ 0.566     $ 0.609     $ 0.550     $ 0.593  
                                 
Outside egg purchases (average cost per dozen)
  $ 1.167     $ 1.114     $ 1.183     $ 1.162  
                                 
Dozen Produced
    640,174       598,042       157,207       161,082  
Dozen Purchased*
    165,225       179,843       37,973       44,175  
Dozen Sold
    805,399       777,885       195,180       205,257  
                                 
* Net of processing loss and inventory adjustments
 

Cost of sales for the fiscal year ended May 29, 2010 was $715.5 million, a decrease of $8.6 million, or 1.2%, as compared to cost of sales of  $724.1 million for fiscal 2009. On a comparable basis, dozens produced increased, dozens purchased from outside shell egg producers decreased and cost of feed ingredients decreased in fiscal 2010. The cost per dozen of shell eggs purchased from outside producers increased due to the volume of specialty shell eggs purchased.   However, due to a lower volume of dozens purchased from outside producers, the cost of outside egg purchases decreased in fiscal 2010 as compared to fiscal 2009.   This fiscal year we produced 79% of the eggs sold by us, as compared to 77% for the previous year. Feed cost for fiscal 2010 was $.349 per dozen, compared to $.391 per dozen for the prior fiscal year, a decrease of 10.7%.  Gross profit decreased from 22.0% of net sales for fiscal 2009 to 21.4% of net sales for fiscal 2010.

On a comparable basis, excluding the Acquisition, cost of sales for fiscal 2010 was $676.4 million, a decrease of $47.7 million, or 6.6%, as compared to cost of sales of $724.1 million for fiscal 2009.

Cost of sales for the thirteen-week period ended May 29, 2010 was $167.4 million, a decrease of $8.3 million, or 4.7%, as compared to cost of sales of $175.7 million for the thirteen-week period ended May 30, 2009.

 
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Selling, General and Administrative Expenses.

   
Fiscal Years Ended
(52 weeks)
 
   
Actual
   
Less: Acquisition
   
Net
             
   
May 29, 2010
   
May 29, 2010
   
May 29, 2010
   
May 30, 2009
   
Change
 
Category
 
(Amounts in thousands)
 
Stock compensation expense
  $ 2,186     $     $ 2,186     $ 495     $ 1,691  
Specialty egg expenses
    21,362       502       20,860       18,879       1,981  
Payroll and overhead
    19,927       723       19,204       19,220       (16 )
Other expenses
    20,055       2,749       17,306       17,951       (645 )
Delivery expense
    28,510       2,747       25,763       26,708       (945 )
Total
  $ 92,040     $ 6,721     $ 85,319     $ 83,253     $ 2,066  

Selling, general and administrative expenses include costs of marketing, distribution, accounting and corporate overhead.  Selling, general and administrative expense was $92.0 million in fiscal 2010, an increase of $8.7 million or 10.4%, as compared to $83.3 million for fiscal 2009. Excluding the Acquisition, selling, general and administrative expense for fiscal 2010 was $85.3 million, an increase of $2.0 million, or 2.4%, as compared to $83.3 million for fiscal 2009.   Stock based compensation plan expense increased $1.7 million for the current fiscal year due mainly to an increase in the closing price of the Company’s Common Stock.  The calculation of stock based compensation plan expense is dependent on the closing stock price of the Company’s Common Stock, which increased from $24.37 at May 30, 2009 to $32.37 at May 29, 2010, representing a 32.8% increase.   Specialty egg expenses represent advertising, commissions, and franchise fees as they are incurred with sales of our specialty eggs.  The expense increase is attributable to the increase in the dozens of specialty eggs sold this year as compared to last fiscal year.  Payroll and overhead expenses decreased slightly but were approximately the same as last year.  Other selling, general and administrative expenses decreased due to decreases in legal, audit, and general insurance expenses. Delivery expense decreased due to lower costs for the use of outside trucking. As a percent of net sales, selling, general and administrative expense increased from 8.9% for fiscal 2009 to 10.1% for fiscal 2010.

   
Fiscal Years Ended
(13 weeks)
 
   
May 29, 2010
   
May 30, 2009
   
Change
 
Category
 
(Amounts in thousands)
 
Stock compensation expense
  $ 170     $ 537     $ (367 )
Specialty egg expenses
    5,228       5,179       49  
Payroll and overhead
    5,426       5,501       (75 )
Other expenses
    4,253       4,658       (405 )
Delivery expense
    7,066       6,863       203  
Total
  $ 22,143     $ 22,738     $ (595 )

Selling, general and administrative expense was $22.1 million for the thirteen-week period ended May 29, 2010, a decrease of $600,000 or 2.6%, as compared to $22.7 million for the thirteen-week period ending May 30, 2009.

Operating Income.   As a result of the above, our operating income was $102.6 million for fiscal 2010, as compared to operating income of $121.5 million for fiscal 2009.  Operating income as a percent of sales for fiscal 2010 was 11.3%, as compared to operating income of 13.1% for fiscal 2009.

Other Income (Expense). Other income or expense consists of income or costs not directly charged or related to operations such as equity in income of affiliates and interest expense. Other income for fiscal 2010 was $889,000 as compared to other expense of $140,000 for fiscal 2009. Interest expense for fiscal 2010 was $520,000 more while interest income was $1.2 million less than fiscal 2009.  Compared to the prior fiscal year, we had higher average long-term borrowing balances and higher invested cash balances. Rates earned on invested cash balances were lower in the current year.  Other income also increased because of increased equity in income of affiliates.  As a percent of net sales, other income was 0.1% for fiscal 2010, as compared to other expense of 0.0% for fiscal 2009.

Income Taxes.   For the fiscal year ended May 29, 2010, our pre-tax income was $103.5 million, as compared to $121.3 million for fiscal 2009.  Income tax expense of $38.0 million was recorded for fiscal 2010 with an effective income tax rate of 36.7%, as compared to $41.5 million for fiscal 2009 with an effective income tax rate of 34.2%.

Our effective rate differs from the federal statutory income tax rate of 35% due to state income taxes and certain items included in income or loss for financial reporting purposes that are not included in taxable income or loss for income tax purposes, including tax exempt interest income, the domestic manufacturers deduction, and net income or loss attributable to noncontrolling interest.

 
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Net income (loss) attributable to noncontrolling interest. Net loss attributable to noncontrolling interest for fiscal 2010 was $2.3 million as compared to net income attributable to noncontrolling interest of $324,000 for fiscal 2009.

Net Income.  As a result of the above, net income for fiscal 2010 was $67.8 million, or $2.85 per basic share and $2.84 per diluted share, as compared to $79.5 million, or $3.34 per basic and diluted share for fiscal 2009.

Capital Resources and LiquidityOur working capital at May 28, 2011was $247.6 million compared to $220.2 million at May 29, 2010. The calculation of working capital is defined as current assets less current liabilities. Our current ratio was 3.30 at May 28, 2011 as compared with 2.87 at May 29, 2010. The current ratio is calculated by dividing current assets by current liabilities. Our need for working capital generally is highest in the last and first fiscal quarters ending in May and August, respectively, when egg prices are normally at seasonal lows. We have $5.1 million in outstanding standby letters of credit, which are collateralized with cash. Our long-term debt at May 28, 2011, including current maturities, amounted to $88.2 million, as compared to $134.7 million at May 29, 2010.

For the fiscal year ended May 28, 2011, $62.3 million in net cash was provided by operating activities. This compares to $116.7 million of net cash provided by operating activities for the fiscal year ended May 29, 2010.  For fiscal 2011, approximately $137.2 million was provided from the sale of short-term investments, $156.9 million was used for the purchase of short-term investments and net $3.1 million was provided by notes receivable and investments in nonconsolidated subsidiaries. We received $4.8 million from the sale of non-voting stock in EB. Approximately $1.9 million was provided from disposal of property, plant and equipment and $20.7 million was used for purchases of property, plant and equipment. Approximately $24.9 million was used for payment of dividends on common stock, $46.5 million was used for principal payments on long-term debt, and $2.6 million was used for payment of a fee connected with the early extinguishment of debt. Approximately $143,000 was received from the issuance of Common Stock from treasury after the exercise of 24,000 stock options having a strike price of $5.93 per share. Approximately $421,000 was used for an equity contribution to South Texas Protein, LLC. The net result of these activities was a decrease in cash of approximately $41.8 million since May 29, 2010.

For the fiscal year ended May 29, 2010, $116.7 million in net cash was provided by operating activities. This compares to $111.3 million of net cash provided by operating activities for the fiscal year ended May 30, 2009.  For fiscal 2010, approximately $31.5 million was provided from the sale of short-term investments, $82.8 million was used for the purchase of investments, and net $4.1 million was provided from notes receivable and equity investments in affiliates. Approximately $7.0 million was provided from disposal of property, plant and equipment, $20.8 million was used for purchases of property, plant and equipment, $8.1 million was used for acquisition of the remaining equity interest in the Hillandale business, and $508,000 was used to acquire the remaining equity interest in Benton County Foods, LLC.  Approximately $19.0 million was used for payment of dividends on common stock and $25.7 million was used for principal payments on long-term debt.  Approximately $308,000 was received from the issuance of Common Stock from treasury.  Approximately $30.0 million was received from additional long-term borrowings. The net result of these activities was an increase in cash of approximately $32.6 million since May 30, 2009.

Certain of our property, plant, and equipment collateralize our notes payable and senior secured notes.  Our long-term debt is described in Note 9 in the notes to the consolidated financial statements. Unless otherwise approved by our lenders, we are required by provisions of our loan agreements to (1) maintain minimum levels of working capital (ratio of not less than 1.25 to 1) and net worth (minimum of $90.0 million tangible net worth, plus 45% of cumulative net income); (2) limit dividends paid in any given quarter to not exceed an amount equal to one third of the previous quarter’s consolidated net income (allowed if no events of default), capital expenditures to an amount not to exceed $60.0 million in any twelve month period, and lease obligations and additional long-term borrowings (total funded debt to total capitalization not to exceed 55%); and (3) maintain various current and cash-flow coverage ratios (1.25 to 1), among other restrictions. At May 28, 2011, we were in compliance with the financial covenant requirements of all loan agreements. Under certain of the loan agreements, the lenders have the option to require the prepayment of any outstanding borrowings in the event we undergo a change in control, as defined in the applicable loan agreement. Our debt agreements also require Fred Adams, the Company’s Chairman, or his family, to maintain ownership of not less than 50% of the outstanding voting stock of the Company.

Capital expenditure requirements are expected to be for the normal repair and replacement of our facilities. We have completed construction of a new integrated layer production complex in Farwell, Texas to replace our Albuquerque, New Mexico complex, which ceased egg production in fiscal 2007. The facility was expected to cost approximately $32.0 million, and was estimated to be complete in January 2010. As of May 28, 2011, capital expenditures related to construction of this complex were approximately $39.5 million (including replacement capital expenditures related to the fire mentioned below).

 
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On July 9, 2009, a fire damaged the Farwell, Texas egg production complex. The 700-acre facility includes a processing plant, feed mill, two pullet houses, and nine layer houses. The fire completely destroyed four of the nine layer houses, with additional loss of laying hens at a fifth house due to smoke inhalation. The effects of lost production and additional expenses related to the fire have been substantially reimbursed by the Company’s insurance carriers. The Company received $16.4 million in proceeds from its insurance carriers to cover its losses due to the fire. The book value of assets written off and expenses incurred, net of amounts reclassified to construction in progress and other assets, as the result of the fire totaled $9.1 million . Insurance proceeds were recognized in the consolidated income statement for fiscal 2010 to offset the assets written off and expenses incurred. Construction to rebuild the destroyed houses is complete. In addition, the Company added a tenth layer house at the complex which has added capacity above the original design. The property damage claim and the business interruption claim related to the Farwell fire were finalized in the fourth quarter of fiscal 2011.

            In the first quarter of fiscal 2011, a fire damaged the Shady Dale, Georgia complex. The fire destroyed one of the twelve layer houses, which was empty at the time. There was an additional loss of laying hens at three adjoining layer houses due to smoke inhalation. The Company intends to seek reimbursement for all of its insured losses, including lost profits and expenses. The Company believes the effects of lost production and additional expenses related to the fire that will be incurred will be substantially covered by the Company’s insurance policies. Any gain resulting from recoveries from the insurance carriers will be recognized when the claim is ultimately settled.

The Company is in the process of constructing four new pullet houses at its complex in Searcy, Arkansas. This project is expected to cost $4.7 million and should be completed in September 2011. These pullet houses will replace existing houses at other Arkansas locations some of which are nearing the end of their lease term.

We previously held auction rate securities (“ARS”) which were purchased from UBS Financial Services Inc. (“UBS”). On June 30, 2010, we exercised a put option that allowed us to sell our ARS back to UBS at par. The par value of these securities was $22,900. These ARS served as collateral for a $14,799 line of credit with UBS. Proceeds received from the sale of the ARS to UBS were used to settle this debt.

We currently have a $1.1 million deferred tax liability due to a subsidiary’s change from a cash basis to an accrual basis taxpayer on May 29, 1988. The Taxpayer Relief Act of 1997 provides that this liability is payable ratably over the 20 years beginning in fiscal 1999. However, such taxes will be due in their entirety in the first fiscal year in which there is a change in ownership control. We are currently making annual payments of approximately $163,000 related to this liability. However, while these current payments reduce cash balances, payment of the $1.1 million deferred tax liability would not affect our consolidated statement of income or stockholders’ equity, as these taxes have been accrued and are reflected on our consolidated balance sheet.

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

Off-Balance Sheet Arrangements

The Company owns 50% of the membership interests in Delta Egg Farm, LLC (“Delta Egg”). The Company is a guarantor of 50% of Delta Egg’s long-term debt, which totaled approximately $10.8 million at May 28, 2011. Delta Egg’s long-term debt is secured by substantially all of the fixed assets of Delta Egg and is due in monthly installments through fiscal 2018. Delta Egg is engaged in the production, processing, and distribution of shell eggs. The other 50% owner also guarantees 50% of the debt. The guarantee arose when Delta Egg borrowed funds to construct its production and processing facility in 1999. The guarantee would be required if Delta Egg is not able to pay the debt. Management of the Company believes that payment under the guarantee will be unlikely because Delta Egg is now well capitalized. On July 11, 2008, this debt was refinanced for a term of ten years. There were additional borrowings under this refinancing due to the construction of an organic egg production and distribution facility near Chase, Kansas costing approximately $13.0 million.

 
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Contractual Obligations

The following table summarizes future estimated cash payments, in thousands, to be made under existing contractual obligations. Further information on debt obligations is contained in Note 9, and on lease obligations in Note 8, in the notes to the consolidated financial statements.

   
Total
   
2012
   
2013
   
2014
   
2015
   
2016
   
Over 5 years
 
Long-Term Debt (Principal)
  $ 88,161     $ 11,743     $ 11,156     $ 10,366     $ 8,946     $ 8,526     $ 37,424  
Long-Term Debt (Interest)
    22,727       5,043       4,358       3,681       3,106       2,578       3,961  
Operating Leases
    3,630       1,177       977       449       357       225       445  
Total
  $ 114,518     $ 17,963     $ 16,491     $ 14,496     $ 12,409     $ 11,329     $ 41,830  

 Impact of Recently Issued Accounting Standards.
 
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”). ASU 2011-04 amends ASC 820, Fair Value Measurements (“ASC 820”), providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the ASC 820 disclosure requirements, particularly for Level 3 fair value measurements. ASU 2011-04 will be effective for the Company’s fourth quarter of fiscal 2012. The adoption of ASU 2011-04 is not expected to have a material effect on the Company’s consolidated financial statements, but may require certain additional disclosures. The amendments in ASU 2011-04 are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.
 
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires the presentation of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. ASU 2011-05 will be effective for the Company’s quarter ending June 2, 2012. The adoption of ASU 2011-05 is not expected to have a material effect on the Company’s condensed consolidated financial statements, but may require a change in the presentation of the Company’s comprehensive income from the statement of stockholder’s equity, where it is currently disclosed, to the presentation of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The amendments in ASU 2011-05 will be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  ASU 2011-05 will be effective for the Company in fiscal 2013.

Critical Accounting Policies.     The preparation of financial statements in accordance with U.S. generally accepted accounting standards requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.

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

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

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

 
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Long-Lived Assets.    Depreciable long-lived assets are primarily comprised of buildings and improvements and machinery and equipment.  Depreciation is provided by the straight-line method over the estimated useful lives, which are 15 to 25 years for buildings and improvements and 3 to 12 years for machinery and equipment.  An increase or decrease in the estimated useful lives would result in changes to depreciation expense.  When property and equipment are retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations. We continually reevaluate the carrying value of our long-lived assets, for events or changes in circumstances, which indicate that the carrying value may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition.  If the sum of the expected future cash flows (undiscounted and without interest charges) are less than the carrying amount of the asset, an impairment loss is recognized to reduce the carrying value of the long-lived asset to the estimated fair value of the asset.

Investment in Affiliates.   We have invested in other companies engaged in the production, processing and distribution of shell eggs and egg products.  Our ownership percentages in these companies range from less than 20% to 50%.  Therefore, these investments are recorded using the cost or the equity method, and accordingly, not consolidated in our financial statements.  Changes in the ownership percentages of these investments might alter the accounting methods currently used. Our investment in these companies amounted to $19.1 million at May 28, 2011. The combined total assets and total liabilities of these companies were approximately $123.1 million and $69.4 million, respectively, at May 28, 2011. We are a guarantor of approximately $5.4 million of long-term debt of one of the affiliates.

Goodwill.    At May 28, 2011, our goodwill balance represented 3.5% of total assets and 5.3% of stockholders’ equity.  Goodwill relates to the following:

Fiscal Period
 
Description
 
Amount
 
1999
 
Acquisition of Hudson Brothers, Inc.
  $ 3,147  
2006
 
Acquisition of Hillandale Farms, LLC
    869  
2007
 
Acquisition of Green Forest Foods, LLC
    179  
2008
 
Revision to purchase price for incremental purchase of Hillandale
    9,257  
2009
 
Revision to purchase price for incremental purchase of Hillandale
    2,527  
2009
 
Acquisition of Zephyr Egg, LLC
    1,876  
2009
 
Acquisition of Tampa Farms, LLC
    4,600  
2010
 
Revision to purchase price for incremental purchase of Hillandale
    (338 )
   
Total Goodwill
  $ 22,117  

Goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually or more frequently if impairment indicators arise, for impairment.  An impairment loss would be recorded if the recorded goodwill exceeds its implied fair value. We have only one operating segment, which is our sole reporting unit.  Accordingly, goodwill is tested for impairment at the entity level.  Significant adverse industry or economic changes, or other factors not anticipated could result in an impairment charge to reduce recorded goodwill.

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

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Our interest expense is sensitive to changes in the general level of U.S. interest rates.  We maintain certain of our debt as fixed rate in nature to mitigate the impact of fluctuations in interest rates.  Under our current policies, we do not use interest rate derivative instruments to manage our exposure to interest rate changes.  A 1% adverse move (decrease) in interest rates would adversely affect the net fair value of our debt by $3.3 million at May 28, 2011.

We are a party to no other material market risk sensitive instruments requiring disclosure.

 
32

 

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
Jackson, Mississippi

We have audited the accompanying consolidated balance sheet of Cal-Maine Foods, Inc. and Subsidiaries as of May 28, 2011 and May 29, 2010, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year period ended May 28, 2011.  Our audits also included the consolidated financial statement schedule listed in the Index at Item 15.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cal-Maine Foods, Inc. and Subsidiaries as of May 28, 2011 and May 29, 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended May 28, 2011 in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cal-Maine Foods, Inc. and Subsidiaries internal control over financial reporting as of May 28, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated August 3, 2011, expressed an unqualified opinion.

 
/S/ FROST, PLLC

Little Rock, Arkansas
August 3, 2011

 
33

 

Cal-Maine Foods, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except for par value amounts)
 
   
May 28
   
May 29
 
   
2011
   
2010
 
Assets
           
 Current assets:
           
Cash and cash equivalents
  $ 57,679     $ 99,453  
Investment securities available-for-sale
    118,750       76,702  
Investment securities trading
          22,900  
Receivables:
               
Trade receivables, less allowance for doubtful
               
accounts of  $686 in 2011 and  $595 in 2010
    54,774       43,212  
Insurance claims receivable
    5,008        
Other
    3,008       375  
      62,790       43,587  
                 
Inventories
    110,021       93,968  
Prepaid expenses and other current assets
    5,801       1,550  
Total current assets
    355,041       338,160  
                 
Other assets:
               
Other investments
    19,142       17,708  
Notes receivable – noncurrent
    3,049        
Goodwill
    22,117       22,117  
Other intangible assets
    10,063       12,523  
Other long-lived assets
    6,544       6,665  
      60,915       59,013  
Property, plant and equipment, less accumulated depreciation
    224,887       234,111  
Total assets
  $ 640,843     $ 631,284  
                 
Liabilities and stockholders' equity
               
Current liabilities:
               
Trade accounts payable
  $ 50,122     $ 37,479  
Accrued dividends payable
    2,424       7,009  
Accrued wages and benefits
    10,802       9,426  
Accrued expenses and other liabilities
    8,621       14,106  
Current maturities of long-term debt
    11,743       29,974  
Deferred income taxes
    23,770       19,980  
Total current liabilities
    107,482       117,974  
                 
Long-term debt, less current maturities
    76,418       104,699  
Other noncurrent liabilities
    3,346       3,299  
Deferred income taxes
    34,720       28,356  
Total liabilities
    221,966       254,328  
                 
Commitments and contingencies – See Notes 8, 9, & 14
               
                 
Stockholders' equity:
               
Common stock, $.01 par value
               
Authorized shares - 60,000 in 2011 and 2010
               
Issued 35,130 shares in 2011 and 2010 with
               
21,465 and 21,441 shares outstanding respectively
    351       351  
Class A common stock, $.01 par value
               
Authorized shares - 2,400 in 2011 and 2010
               
Issued and outstanding shares - 2,400 in 2011 and 2010
    24       24  
Paid-in capital
    33,419       32,699  
Retained earnings
    406,361       365,821  
Accumulated other comprehensive loss, net of tax
    (320 )      
Common stock in treasury, at cost –13,665 shares in 2011
               
and 13,689 in 2010
    (20,929 )     (20,966 )
Total Cal-Maine Foods, Inc. stockholders' equity
    418,906       377,929  
Noncontrolling interest in consolidated entities
    (29 )     (973 )
Total stockholders’ equity
    418,877       376,956  
Total liabilities and stockholders' equity
  $ 640,843     $ 631,284  
See accompanying notes.

 
34

 

Cal-Maine Foods, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share amounts)

   
Fiscal years ended
 
   
May 28
   
May 29
   
May 30
 
   
2011
   
2010
   
2009
 
Net sales
  $ 941,981     $ 910,143     $ 928,812  
Cost of sales
    757,050       715,499       724,085  
Gross profit
    184,931       194,644       204,727  
Selling, general and administrative
    101,448       92,040       83,253  
Operating income
    83,483       102,604       121,474  
                         
Other income (expense):
                       
Interest expense
    (6,856 )     (7,616 )     (7,096 )
Interest income
    834       888       2,054  
Loss on early extinguishment of debt
    (2,648 )            
Gain on sale of stock in Eggland’s BestTM
    4,829              
Equity in income of affiliates
    4,701       3,507       2,612  
Other, net
    7,328       4,110       2,290  
      8,188       889       (140 )
Income before income taxes and noncontrolling interest
    91,671       103,493       121,334  
Income tax expense
    33,403       37,961       41,510  
Net income including noncontrolling interest
    58,268       65,532       79,824  
Less:  Net income (loss) attributable to noncontrolling interest
    (2,571 )     (2,291 )     324  
Net income attributable to Cal-Maine Foods, Inc.
  $ 60,839     $ 67,823     $ 79,500  
                         
Net income per share:
                       
Basic
  $ 2.55     $ 2.85     $ 3.34  
Diluted
  $ 2.54     $ 2.84     $ 3.34  
Weighted average shares outstanding:
                       
Basic
    23,855       23,812       23,769  
Diluted
    23,942       23,877       23,811  
See accompanying notes.

 
35

 

Cal-Maine Foods, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)

<
    
Common Stock
                               
               
Class A
   
Class A
   
Treasury
   
Treasury
   
Paid In
   
Retained
   
Accum. Other
   
Noncontrolling
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Earnings
   
Comp. Loss
   
Interests
   
Total
 
Balance at May 31, 2008
    35,130     $ 351       2,400     $ 24       13,813     $ (21,156 )   $ 29,697     $ 267,616     $ (852 )   $ 1,687     $ 277,367  
                                                                                         
Dividends
    -       -       -       -       -       -       -       (26,493 )     -       -       (26,493 )
Distributions
    -       -       -       -       -       -       -       -       -       (1,053 )     (1,053 )
Issuance of common stock from treasury
    -       -       -       -       (72 )     111       2,183