Total stock based compensation expense for the thirty-ninethirteen weeks ended February 25,September 2, 2017 and FebruaryAugust 27, 2016 was $2.5 million$859,000 and $2.2 million,$848,000, respectively. 

Unrecognized compensation expense as a result of non-vested shares of the 2012 Omnibus Long-Term Incentive Plan at February 25,September 2, 2017 was $6.9$4.9 million and will be recorded over a weighted average period of 2.31.9 years.  Refer to Note 1110 of our May 28, 2016June 3, 2017 audited financial statements for further information on our stock compensation plans.

At February 25,September 2, 2017, there were 247,735243,150 restricted shares outstanding, with a weighted average grant date fair value of $42.76 per share. A summary of theThe Company’s restricted share activity for the thirty-ninethirteen weeks ended February 25,September 2, 2017 follows:

Inventories consisted of the following (in thousands):

We grow and maintain flocks of layers (mature female chickens), pullets (young female(female chickens, under 18 weeks of age), and breeders (male and female chickens used to produce fertile eggs to hatch for egg production flocks). Our total flock at February 25,September 2, 2017, consisted of approximately 8.59.1 million pullets and breeders and 38.136.7 million layers.

The Company maintained standby letters of credit (“LOC”) totaling $3.7$4.2 million at February 25,September 2, 2017.  The LOCs are collateralized with cash which is included in the line item “Other assets” in the Condensed Consolidated Balance Sheets.    The outstanding LOCs are for the benefit of certain insurance companies, and are not recorded as a liability on the consolidated balance sheets.

Legal Contingencies

The Company is a defendant in certain legal actions, and intends to vigorously defend its position in these actions.  If the Company’s assessment of a contingency indicates it is probable a material loss has been incurred and the amount of the liability can be reasonably estimated, the estimated liability is accrued in the Company’s financial statements.    If the assessment indicates a potential material loss contingency is not probable, but is reasonably possible, or probable but cannot be reasonably estimated, then the nature of the contingent liability, together with an estimate of the possible loss or range of possible loss will be disclosed, or a statement will be made that such an estimate cannot be made.

These legal actions are discussed in detail at Part II, Item 1, of this report.

6.5.   Net Income (Loss)Loss per Common Share  

Basic net income (loss)loss per share was calculated by dividing net income (loss)loss by the weighted-average number of common shares outstanding during the period.  Diluted net income (loss)loss per share was calculated by dividing net income (loss)loss by the weighted-average number of common shares outstanding during the period plus the dilutive effects of options and restricted stock.  Due to the net loss in the thirty-ninethirteen weeks ended February 25,September 2, 2017 and August 27, 2016, restricted shares in the amount of 145,044112,353 and 140,551, respectively, were excluded from the calculation of diluted earningsnet loss per share because their inclusion would have been antidilutive.  The computations of basic and diluted net income (loss)loss per share attributable to the Company are as follows (in thousands, except per share data):

We make an accrual of dividends payable at the end of each quarter according to the Company’s dividend policy adopted by its Board of Directors. The Company pays a dividend to shareholders of its Common Stock and Class A Common Stock on a quarterly basis for each quarter for which the Company reports net income attributable to Cal-Maine Foods, Inc. computed in accordance with 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 pays dividends to shareholders of record on the 65th day after the quarter end. Dividends are payable on the 15th day following the record date. Following a quarter for which the Company does not report net income attributable to Cal-Maine Foods, Inc., the Company will not pay a dividend for a subsequent profitable quarter until the Company is profitable on a cumulative basis computed from the date of the last quarter for which a dividend was paid. Therefore, the Company did not pay a dividend with respect to the fourth quarter of fiscal 2016, or the first and second quartersany quarter of fiscal 2017, and will not pay a dividend for the thirdfirst quarter of fiscal 2017.2018. At February 25,September 2, 2017, cumulative losses that must be recovered prior to paying a dividend were $50.2$90.6 million.    When applicable, the amount of the accrual appears on the Condensed Consolidated Balance Sheets as “Accrued dividends payable.”

The Company is required to categorize both financial and nonfinancial assets and liabilities based on the following fair value hierarchy.  The fair value of an asset is the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable, and willing parties able to engage in the transaction. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor.

The disclosuredisclosures of fair value of certain financial assets and liabilities that are recorded at cost are as follows:

In accordance with the fair value hierarchy described above, the following table shows the fair value of financial assets and liabilities measured at fair value on a recurring basis as of February 25,September 2, 2017 and May 28, 2016June 3, 2017 (in thousands):

Investment securities – available-for-sale, classified as level 2, consist of U.S. government and agency obligations, taxable and tax exempt municipal bonds, zero coupon municipal bonds, foreign government obligations, asset backed securities and corporate bonds with maturities of three months or longer when purchased. We classify these securities as current, because amounts invested are available for current operations. Observable inputs for these securities are yields, credit risks, default rates, and volatility.

9.8.   Investment Securities

The following represents the Company’s investment securities as of February 25,September 2, 2017 and May 28, 2016June 3, 2017 (in thousands):

Proceeds from sales of available-for-sale securities were $228.3$34.1 million and $221.9$92.8 million during the thirty-ninethirteen weeks ended February 25,September 2, 2017 and FebruaryAugust 27, 2016, respectively. Gross realized gains during the thirty-ninethirteen weeks ended ended February 25,September 2, 2017 and FebruaryAugust 27, 2016 were $231,000$16,000 and $100,000,$231,000, respectively.  Gross realized losses during the thirty-ninethirteen weeks ended February 25,September 2, 2017 and FebruaryAugust 27, 2016 were $6,000zero and $102,000,$6,000, respectively. For purposes of determining gross realized gains and losses, the cost of securities sold is based on the specific identification method.

Unrealized holding gains and (losses), net of taxes, for the thirty-ninethirteen weeks ended February 25,September 2, 2017 and FebruaryAugust 27, 2016 were as follows (in thousands):

Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations with or without call or prepayment penalties.  Contractual maturities at February 25,September 2, 2017, are as follows (in thousands):

The following reflects the equity activity, including our noncontrolling interest, for the thirty-ninethirteen weeks ended February 25,September 2, 2017 (in thousands):

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 closest to May 31.

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

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

From April through JuneIn 2015, our industry experienced a significant avian influenza (“AI”) outbreak, primarily in the upper Midwestern U.S.  There were no positive tests for AI at any of our locations. Based on several published industry estimates, we believe approximately 12% of the national flock of laying hens was affected.  TheDuring April through June 2015, the affected laying hens were either destroyed by the disease or euthanized.  During April through June 2015, theThe USDA data showed the supply of laying hens decreased substantially, and thensubstantially. Since that time, hen numbers began to recover and approacheventually exceed pre-AI levels.

Egg prices increased significantly during the summer and fall of 2015. The average Urner-Barry Thursday price for the large market (i.e. conventional shell eggs) in the southeastern region for the months of June through November 2015 was $2.32 per dozen, with a peak of $2.97 in August.  Subsequent to November 2015, shell egg prices declined.  The Urner Barry price index ("UB index") hit a decade-low level in both our fiscal 2016 fourth quarter and fiscal 2017 second quarter. During our fiscal 2018 first quarter, the UB index averaged $0.94 per dozen, a 25.3% increase over the prior year period average of fiscal 2017 it increased slightly, but$0.75 per dozen. In spite of this increase, the index remained at significantly lower levels thanbelow historical levels. Subsequent to the corresponding periodend of last year.  During our fiscal 2017 second2018 first quarter it returnedhas continued to and dropped below the low levels seen during the fiscal 2016 fourth quarter. Early in our fiscal 2017 third quarter we saw a significant increase but prices dropped again after Christmas.increase.

According to Nielsen data, retail customer demand for shell eggs has remained strong. The USDA reports that egg export demand has improved since the beginning of fiscal 2017,2017; however, it has still not fully recovered fromto levels prior to the AI outbreak. Additionally, we havethe industry experienced reduced demand for egg products, as many of our commercial customers reformulated their products to use fewer eggs when prices spiked and have been slow to resume previous egg usage. Together with the increased supply of hens, these factors have created an oversupply of eggs, with continued pressure on

market prices. However, recentRecently, increasing exports have returned to historical levels, although they remain below the peaks seen just prior to the AI outbreak, and USDA reports show the chick hatch has been trending down, suggesting there may be a moderation in the size of the laying hen flock as the year progresses.  We expect the egg markets to remain under pressure and we do not expect to see any meaningful improvement until there is a better balance of supply and demand.over time. Accordingly, our net average selling pricesprice for shell eggs for the thirdfirst quarter and year to date periods of fiscal 2017 were $1.130 and $1.0202018 was $1.017 compared with $1.568 and $1.919$0.952 for the corresponding periodsperiod of fiscal 2016, respectively.

We are one of the largest producers and marketers of value-added specialty shell eggs in the U.S. They have been a significant and growing portion of the market in recent years. During our fiscal 2016 a number of large restaurant chains, food service companies and grocery chains, including our largest customers, announced goals to transition to a cage-free egg supply chain by specified future dates. We are working with our customers to achieve smooth progress in meeting their goals. Our focus for future expansion at our farms will be environments that are cage-free or with equipment that can easily be converted to cage-free, based on a timeline to meet our customer’s needs.

For the thirteen weeks ended February 25,September 2, 2017, we produced approximately 84%86% of the total number of shell eggs we sold.  This comparessold compared to 77%82% in the comparable prior year period.  We produced 7.4% more dozens during the thirteen weeks ended September 2, 2017 than in the corresponding period of last year. For the thirteen weeks ended February 25,September 2, 2017, approximately 7%9% of such production was provided by contract producers who utilize their facilities in the production of shell eggs by layers owned by us compared to 4%5% for the same period of last year. This increase represents contract production acquired with our fiscal 2017 acquisitions. We own the shell eggs produced under these arrangements.

Our cost of production is materially affected by feed costs.  Feed costs averaged approximately 58%55% of our total farm egg production cost for the thirteen and thirty-nine weeks ended February 25,September 2, 2017, compared to 60% for the same period of fiscal 2017. Changes in market prices for corn and soybean meal, the primary ingredients in the feed we use, result in changes in our cost of goods sold.   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 U.S. and foreign governments.  Increased U.S. acreage and large per acre yields for bothWe anticipate significant corn and soybeanssoybean crops in 2017, which combined with the large 2016 crops should provide an adequate domestic supplies for bothsupply of our primary feed ingredients.ingredients in fiscal 2018. 

DuringWhile the secondrecent hurricanes that hit the United States following the end of our first fiscal quarter of fiscal 2017, the Company acquired substantially all of the egg production assets of Foodonics International, Inc. and its related entities doing business as Dixie Egg Company ("Foodonics") for $68.6 million of cash and $3.0 million of deferred purchase price. The acquired assets include commercial egg production and processing facilities with capacity for 1.6 million laying hens, contract grower arrangements for an additional 1.5 million laying hens, and related feed production, milling and distribution facilities2018 caused disruptions to our operations in Georgia, Alabama, and Florida. The Company also acquired Foodonics' interest in American Egg Products, LLC ("AEP") and the Eggland's Best franchise with licensing rights for portions of certain markets in Alabama,Texas, Florida and Georgia, as well as Puerto Rico, Bahamas and Cuba. The Company now owns 100%we did not sustain any material loss of AEP. The acquired operations of Foodonics are included in the accompanying financial statements as of October 16, 2016, the effective date of the transaction.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items from our Condensed Consolidated Statements of Operations expressed as a percentage of net sales.

NET SALES

Shell eggs and egg products made up approximately 98% and 2% of net sales, respectively, for the thirteen weeks ended February 25, 2017.  Net sales for the thirteen weeks ended February 25,September 2, 2017 were $306.5$262.8 million, a decreasean increase of $143.3$23.0 million, or 31.8%9.6%, compared to net sales of $449.8$239.8 million for the thirteen weeks ended FebruaryAugust 27, 2016,2016. The increase was primarily due to the decreasean increase in egg selling prices. Totalprices and dozens sold.

Shell egg sales made up approximately 98% of shell eggs sold also decreasednet sales for the current thirteen-week period compared to the same period in fiscal 2016.thirteen weeks ended September 2, 2017.  Dozens sold for the thirdfirst quarter of fiscal year 20172018 were 263.6249.4 million, a decrease of 14.02.9% increase from 242.3 million or 5.0%, compared to 277.6 milliondozen for the thirdfirst quarter of fiscal 2016 resulting in2017. The volume increase accounted for a decrease$6.8 million increase in net sales of $15.8 million.sales. 

Net average selling price per dozen of shell eggs was $1.017 for the thirteen weeks ended February 25,September 2, 2017, was $1.130, compared to $1.568$0.952 for the thirteen weeks ended FebruaryAugust 27, 2016,2016. The 6.8% increase in average selling price accounted for a decrease of 27.9%, resulting in a corresponding decrease$15.7 million increase in net shell egg sales of $121.6 million.sales.  Net average selling price is the blended price for all sizes and grades of shell eggs, including non-graded shell egg sales, breaking stock, and undergrades.