The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the results for the interim periods presented have been included. The preparation of condensed consolidated financial statements requires us to make estimates and assumptions. These estimates and assumptions affected reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and assumptions.  Operating results for the thirteen and thirty-nine weeks ended September 2, 2017March 3, 2018 are not necessarily indicative of the results that may be expected for the year ending June 2, 2018.  

The condensed consolidated balance sheet at June 3, 2017 was derived from the audited consolidated financial statements at that date.  It does not include all of the information and footnotes required by GAAP for complete financial statements.��

For further information, refer to the consolidated financial statements and footnotes thereto included in Cal-Maine Foods, Inc.'s annual report on Form 10-K for the fiscal year ended June 3, 2017. References to “we,” “us,” “our,” or the “Company” refer to Cal-Maine Foods, Inc.

Total stock based compensation expense for the thirteenthirty-nine weeks ended September 2,March 3, 2018 and February 25, 2017 was $2.6 million and August 27, 2016 was $859,000 and $848,000,$2.5 million, respectively. 

Unrecognized compensation expense as a result of non-vested shares of the 2012 Omnibus Long-Term Incentive Plan at September 2, 2017March 3, 2018 was $4.9$6.9 million and will be recorded over a weighted average period of 1.92.2 years.  Refer to Note 10 of our June 3, 2017 audited financial statements for further information on our stock compensation plans.

At September 2, 2017,March 3, 2018, there were 243,150243,060 restricted shares outstanding, with a weighted average grant date fair value of $42.76$45.30 per share. The Company’s restricted share activity for the thirteenthirty-nine weeks ended September 2, 2017March 3, 2018 follows:

Inventories consisted of the following (in thousands):

We grow and maintain flocks of layers (mature female chickens), pullets (female chickens, under 18 weeks of age), and breeders (male and female chickens used to produce fertile eggs to hatch for egg production flocks). Our total flock at September 2, 2017,March 3, 2018, consisted of approximately 9.19.2 million pullets and breeders and 36.737.8 million layers.

The Company maintained standby letters of credit (“LOC”) totaling $4.2 million at September 2, 2017.March 3, 2018.  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.

5.   Net LossIncome (Loss) per Common Share  

Basic net lossincome (loss) per share was calculated by dividing net lossincome (loss) by the weighted-average number of common shares outstanding during the period.  Diluted net lossincome (loss) per share was calculated by dividing net lossincome (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 thirteenthirty-nine weeks ended September 2,February 25, 2017, and August 27, 2016, restricted shares in the amount of 112,353 and 140,551, respectively, were excluded from the calculation of diluted net loss per share because their inclusion would have been antidilutive.  The computations of basic and diluted net lossincome (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 any quarter of fiscal 2017, and will not pay a dividend for the first, quartersecond, or third quarters of fiscal 2018. At September 2, 2017,March 3, 2018, the cumulative losses that must be recovered prior to paying a dividend were $90.6$20.5 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 disclosures 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 September 2, 2017March 3, 2018 and June 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.

8.   Investment Securities

The following represents the Company’s investment securities as of September 2, 2017March 3, 2018 and June 3, 2017 (in thousands):

Proceeds from sales of available-for-sale securities were $34.1$95.3 million and $92.8$228.3 million during the thirteenthirty-nine weeks ended September 2,March 3, 2018 and February 25, 2017, and August 27, 2016, respectively. Gross realized gains during the thirteenthirty-nine weeks ended ended September 2,March 3, 2018 and February 25, 2017 and August 27, 2016 were $16,000$25,000 and $231,000, respectively.  Gross realized losses during the thirteenthirty-nine weeks ended September 2,March 3, 2018 and February 25, 2017 and August 27, 2016 were zero$5,000 and $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 thirteenthirty-nine weeks ended September 2,March 3, 2018 and February 25, 2017 and August 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 September 2, 2017,March 3, 2018, are as follows (in thousands):

The following reflects the equity activity, including our noncontrolling interest, for the thirteenthirty-nine weeks ended September 2, 2017March 3, 2018 (in thousands)thousands, except share amounts):

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.").  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, 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.

In 2015, our industry experienced a significant avian influenza (“AI”) outbreak, primarily in the upper Midwestern U.S.  There were no positive tests for AI at any of our locations. Based on several published industry estimates, we believe approximately 12% of the national flock of laying hens was affected.  During April through June 2015, the affected laying hens were either destroyed by the disease or euthanized.  The USDA data showed the supply of laying hens decreased substantially. Since that time, hen numbers began to recoverhave recovered and eventually exceed pre-AIeven exceeded pre–AI levels byin late 2016. In February 2017, the USDA issued revised data that showed the size of the laying hen flock for calendar years 2015 and 2016 was meaningfully higher in both years than previously reported.

Egg prices increased significantly during the summer and fall of 2015. The average Urner-Barryof Thursday priceprices for the UB southeastern large market (i.e. conventional shell eggs) in the southeastern regionindex 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 priceUB southeastern large 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,shell egg prices have rebounded due to strong demand illustrating the volatility of our industry. During the thirty-nine weeks ended March 3, 2018, the UB southeastern large index averaged $0.94$1.37 per dozen, a 25.3%59.5% increase over the comparable period of the prior year period average of $0.75which averaged $0.86 per dozen. In spite of this increase, the index remained below historical levels. Subsequent to the end of our fiscal 2018 first quarter it has continued to increase.

According to Nielsen data, retail customer demand for shell eggscalendar year 2017 and early 2018 has remained strong.been strong and exceeded normal seasonal trends, supported by increased egg promotions in grocery stores. After a period of sluggish demand from institutional food customers, this sector has seen increasing egg usage in recent months. The USDA reports that shell egg exportexports expanded in calendar 2017 and have recovered from previous low levels following the 2015 avian influenza (AI) outbreak. Export demand has improved sincealso increased as a result of the beginning of fiscal 2017; however, it has not fully recovered to levels prior to the AI outbreak. Additionally, the industry experienced reducedreported Fipronil contaminations across Europe and Southeast Asia. Together, these demand for egg products, as many commercial customers reformulated their products to use fewer eggs when prices spiked andtrends have been slow to resume previous egg usage. Togetherresulted in a more favorable market environment compared with the increased supply of hens, these factors created an oversupply of eggs, with pressure on

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 September 2, 2017,March 3, 2018, we produced approximately 86%81% of the total number of shell eggs we sold compared to 82%84% in the comparable prior year period.  We produced 7.4% more0.6% less dozens during the thirteen weeks ended September 2, 2017March 3, 2018 than in the corresponding period of last year. For the thirteen weeks ended September 2,March 3, 2018 and February 25, 2017, approximately 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 5% for the same period of last year. This increase represents contract production acquired with our fiscal 2017 acquisitions.us. We own the shell eggs produced under these arrangements.

Our cost of production is materially affected by feed costs.  Feed costs averaged approximately 55%57% and 58% of our total farm egg production cost for the thirteen weeks ended September 2,March 3, 2018 and February 25, 2017, compared to 60% for the same period of fiscal 2017.respectively. 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 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.  We anticipate significantLarge U.S. corn and soybean crops were harvested in 2017, which combined with the large 2016 crops should provide an adequate supply of our primary feed ingredients induring the remainder of fiscal 2018. 

WhileOn December 22, 2017, the recent hurricanes that hitPresident of the United States followingsigned into law the Tax Cuts and Jobs Act of 2017 (the “Act”). The new tax legislation reduces the United States corporate tax rate from 35% to 21% effective January 1, 2018. As a result, the Company recognized an income tax benefit for the period related to the remeasurement of the Company’s net deferred tax liability. The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. The Company has not completed the accounting for the tax effects of enactment of the Act; however, the Company has made a reasonable estimate of the effects on existing deferred balances. The provisional amount recorded related to the remeasurement of our deferred tax balance was $35 million, which is included as a component of income tax (benefit) expense from continuing operations.

On December 29, 2017, the Company reached an agreement on material terms of the settlement of several large direct action purchasers' antitrust claims against the Company. The agreement was finalized and effective January 30, 2018. Pursuant to the agreement, the Company settled the claims with a single $80.8 million payment, which is $54.8 million net of tax, or $1.13 per basic and diluted share. As a result, the Company recorded the legal settlement expense and offsetting liability to operating expense and current liabilities, respectively, in the second quarter of fiscal 2018. The Company paid the settlement on March 23, 2018, subsequent to the end of our first fiscal quarter of 2018 caused disruptions to our operations in Texas, Florida and Georgia, we did not sustain any material loss of egg production.third quarter.

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

Net sales for the thirteen weeks ended September 2, 2017March 3, 2018 were $262.8$435.8 million, an increase of $23.0$129.3 million, or 9.6%42.2%, compared to net sales of $239.8$306.5 million for the thirteen weeks ended August 27, 2016.February 25, 2017. The increase was primarily due to an increase in egg selling prices and, to a lesser extent, an increase in dozens sold.

Shell egg sales made up approximately 98%97.2% of net sales for the thirteen weeks ended September 2, 2017.March 3, 2018.  Dozens sold for the firstthird quarter of fiscal year 2018 were 249.4up 9.6 million to 273.2 million, a 2.9%3.6% increase from 242.3263.6 million dozen for the firstthird quarter of fiscal 2017. The volume increase accounted for a $6.8$10.8 million increase in net sales. 

Net average selling price per dozen of shell eggs was $1.017$1.545 for the thirteen weeks ended September 2, 2017,March 3, 2018, compared to $0.952$1.130 for the thirteen weeks ended August 27, 2016.February 25, 2017. The 6.8%36.7% increase in average selling price accounted for a $15.7$113.4 million increase in net 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.    

The table below represents an analysis of our non-specialty and specialty shell egg sales (in thousands, except percentage data).  Following the table is a discussion of the information presented in the table.

Non-specialty shell eggs include all shell egg sales not specifically identified as specialty or co-pack specialty shell egg sales.   This market is characterized generally by an inelasticity of demand. Small increases or decreases in production or demand can have a large positive or adverse effect on selling prices.  For the thirteen weeks ended September 2, 2017,March 3, 2018, non-specialty shell egg dozens sold increased 3.3%, and the average selling price increased 66.6% to $1.411 from $0.847 for the same period of fiscal 2017. For the thirty-nine weeks ended March 3, 2018, non-specialty shell egg dozens sold increased approximately 5.2%4.4%, and the average selling price increased 22.4%57.4% to $0.760$1.111 from $0.621$0.706 for the same period of fiscal 2017.

Specialty shell eggs, which include nutritionally enhanced, cage-free, organic, and brown eggs continue to make up a large portion of our total shell egg revenue and dozens sold.  Specialty egg retail prices are less cyclical than non-specialty shell egg prices and are generally higher due to consumer willingness to pay for the perceived benefits from these products.  This was particularly evident in recent quarters prior to our first quarter of fiscal 2018 as non-specialty egg prices declined more than specialty egg prices.  However, asAs non-specialty egg prices declined, we experienced some margin and volume pressures on specialty egg sales.  For the thirteen weeks ended September 2, 2017,March 3, 2018, specialty shell egg dozens sold decreased 2.3%increased 6.4%, andbut the average selling price decreased 4.8%1.6% to $1.878$1.933 from $1.973$1.965 for the same period of fiscal 2017. For the thirty-nine weeks ended March 3, 2018, specialty shell egg dozens sold increased 3.3%, but the average selling price decreased 3.7% to $1.907 from $1.980 for the same period of fiscal 2017.

Co-pack specialty shell eggs are sold primarily through co-pack arrangements, a common practice in the industry whereby production and processing of certain products is outsourced to another producer.  Shell egg sales in this category represented 1.3% and 1.7% dozen for the quarters ended September 2, 2017 and August 27, 2016.  Co-pack specialty shell eggs sold during the thirteenthirty-nine weeks ended September 2,March 3, 2018 and February 25, 2017 and August 27, 2016, were 3.29.8 million and 4.212.8 million, which represented 1.2% and 1.7% of total dozens sold for those periods, respectively.

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

COST OF SALES

Cost of sales consists of costs directly related to production, processing and packing of 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.