# CAL-MAINE FOODS INC (CALM) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CAL-MAINE FOODS INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/16160/000156276222000297/calm-20210529_10K.htm
Accession: 0001562762-22-000297
Filing date: 2022-07-19
Report date: 2022-05-28
Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub.
Confidence: high

Company profile: /company/CALM/
All MD&A years: /company/CALM/mda/
Next year: /company/CALM/mda/fy2023/ (FY 2023)

OVERVIEW

Cal-Maine Foods, Inc. 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.
 
The Company,
 
which is
 
headquartered in
 
Ridgeland, Mississippi,
 
is the

largest
 
producer
 
and
 
distributor
 
of
 
fresh
 
shell
 
eggs
 
in
 
the
 
United
 
States
 
(“U.S”).
 
In
 
fiscal
 
2022,
 
we
 
sold
 
approximately

1,083.8 million dozen shell eggs, which we believe
 
represented approximately 20% of domestic shell egg consumption.
 
Our total

flock as of May 28, 2022 of approximately 42.2 million layers and 11.5 million pullets and breeders is the largest in the U.S. We

sell most
 
of our
 
shell eggs
 
to a
 
diverse
 
group of
 
customers, including
 
national
 
and regional
 
grocery
 
store chains,
 
club stores,

companies
 
servicing independent supermarkets in the U.S., food service distributors, and egg product consumers in states across

the southwestern, southeastern, mid-western and mid-Atlantic regions
 
of the U.S.

The
 
Company
 
has
 
one
 
operating
 
segment,
 
which
 
is
 
the
 
production,
 
grading,
 
packaging,
 
marketing
 
and
 
distribution
 
of
 
shell

eggs. Many
 
of our
 
customers
 
rely
 
on
 
us
 
to
 
provide
 
most
 
of their
 
shell
 
egg
 
needs,
 
including
 
specialty
 
and
 
conventional
 
eggs.

Specialty eggs
 
represent a
 
broad range
 
of products. We
 
classify nutritionally
 
enhanced, cage-free,
 
organic,
 
free-range, pasture-

raised and brown
 
eggs as specialty eggs
 
for accounting and reporting
 
purposes. We
 
classify all other shell
 
eggs as conventional

eggs.
 
While
 
we
 
report
 
separate
 
sales
 
information
 
for
 
these
 
types
 
of
 
eggs,
 
there
 
are
 
a
 
number
 
of
 
cost
 
factors
 
which
 
are
 
not

specifically
 
available
 
for
 
conventional
 
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. For further description

of our business, refer to

Part I. Item I. Business

.

HPAI

We
 
are
 
closely
 
monitoring
 
the outbreaks
 
of
 
highly
 
pathogenic
 
avian
 
influenza
 
(“HPAI”)
 
,
 
the
 
latest of
 
which
 
was
 
detected
 
in

commercial
 
flocks
 
in
 
the
 
U.S.
 
in
 
February
 
2022.
 
According
 
to
 
the
 
U.S.
 
Centers
 
for
 
Disease
 
Control
 
and
 
Prevention,
 
these

detections
 
do not
 
present
 
an immediate
 
public
 
health
 
concern.
 
There
 
have
 
been
 
no positive
 
tests for
 
HPAI
 
at
 
any
 
Cal-Maine

Foods’ owned or
 
contracted production facility
 
as of July 19,
 
2022. The USDA division
 
of Animal and
 
Plant Health Inspection

Service (“APHIS”), reported that approximately 30.7 million commercial layer hens have
 
been depopulated due to HPAI. Pullets

impacted
 
comprise
 
approximately
 
1.0
 
million.
 
According
 
to
 
APHIS,
 
the
 
most
 
recently
 
reported
 
outbreaks
 
of
 
HPAI
 
affecting

commercial
 
layer hens
 
and pullets
 
occurred
 
June 7,
 
2022 and
 
June 9,
 
2022,
 
respectively.
 
We
 
believe
 
the HPAI
 
outbreak
 
will

continue to impact the overall supply of eggs until the layer hen flock is fully replenished. While no farm is immune from HPAI,

we believe we have
 
implemented and continue to maintain
 
robust biosecurity programs across our
 
locations. We are also working

closely
 
with
 
federal,
 
state
 
and
 
local
 
government
 
officials
 
and
 
focused
 
industry
 
groups
 
to
 
mitigate
 
the
 
risk
 
of
 
this
 
and
 
future

outbreaks and effectively manage our response, if needed.

COVID-19

Since early
 
2020, the
 
coronavirus (“COVID-19”)
 
outbreak, characterized
 
as a
 
pandemic by
 
the World
 
Health Organization
 
on

March
 
11,
 
2020,
 
has
 
caused
 
significant
 
disruptions
 
in
 
international
 
and
 
U.S.
 
economies
 
and
 
markets.
 
We
 
understand
 
the

challenges and difficult economic
 
environment facing families
 
in the communities
 
where we live
 
and work, and
 
we are committed

to helping where we can. We have provided food assistance to
 
those in need by donating approximately 829 thousand
 
dozen eggs

in
 
fiscal
 
2022.
 
We
 
believe
 
we
 
are
 
taking
 
all
 
reasonable
 
precautions
 
in
 
the
 
management
 
of
 
our
 
operations
 
in
 
response
 
to
 
the

COVID-19 pandemic.
 
Our top priority
 
is the health
 
and safety
 
of our
 
employees, who
 
work hard
 
each day
 
to produce eggs
 
for

our customers. As part of the nation’s food supply, we work in a critical infrastructure industry, and we believe we have a special

responsibility to
 
maintain our
 
normal work
 
schedule. As
 
such, we
 
are in
 
regular communication
 
with our
 
managers across
 
our

operations
 
and continue
 
to closely
 
monitor the
 
situation in
 
our facilities
 
and in
 
the communities
 
where we
 
live and
 
work.
 
We

have implemented
 
procedures designed
 
to protect
 
our employees,
 
taking into
 
account guidelines
 
published
 
by the
 
Centers for

Disease Control and other government health agencies, and we have strict sanitation protocols and biosecurity measures in place

Table of Contents

24

throughout our operations
 
with restricted access
 
to visitors. There
 
are no known
 
indications that COVID-19
 
affects chickens
 
or

can be transferred through the food supply.

We
 
continue to
 
proactively monitor
 
and manage
 
operations during
 
the COVID-19 pandemic,
 
including additional
 
related costs

that we incurred or
 
may incur in the
 
future. The pandemic had
 
a negative impact on
 
our business through disruptions in
 
the supply

chain such as
 
increased costs and
 
limited availability of
 
packaging supplies, increased
 
labor costs, increased
 
medical costs and,

more recently, inflation.

In fiscal
 
2022 and
 
2021, we
 
spent $2.2
 
million and
 
$2.3 million
 
(excluding medical
 
insurance claims)
 
related to
 
the pandemic

and
 
its
 
effects,
 
respectively.
 
The
 
majority
 
of
 
these
 
expenses
 
resulted
 
from
 
additional
 
labor
 
and
 
increased
 
cost
 
of
 
packaging

materials, which are
 
primarily reflected in cost
 
of sales. Medical insurance
 
claims related to COVID-19
 
paid during fiscal 2022

and 2021 were an additional $2.4 million and $1.4 million, respectively.

Executive Overview of Results – Fiscal Years
 
Ended May 28, 2022, May 29, 2021 and May 30, 2020

Fiscal Years
 
Ended

May 28, 2022

May 29, 2021

May 30, 2020

Net sales (in thousands)

$

1,777,159

$

1,348,987

$

1,351,609

Gross profit (in thousands)

$

337,059

$

160,661

$

179,588

Net average shell egg price

(a)

$

1.579

$

1.217

$

1.231

Average UB Southeast
 
Region - Shell Eggs - White Large

$

1.712

$

1.155

$

1.220

Feed costs per dozen produced

$

0.571

$

0.446

$

0.409

(a) 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.

Throughout the
 
first three quarters
 
of our
 
fiscal year 2020,
 
an oversupply
 
of eggs negatively
 
affected the
 
price of
 
conventional

eggs and demand
 
for specialty eggs
 
was negatively impacted
 
by the low
 
conventional egg prices.
 
For the first
 
three quarters of

fiscal 2020,
 
the average UB
 
southeastern large
 
index price was
 
down 21.9%
 
compared with the
 
prior-year period.
 
However, in

the fourth quarter of fiscal 2020, the average UB southeastern large index price was 62.4% higher than the average price through

the first three quarters in fiscal 2020 due to increased demand related to the onset of
 
the pandemic, as consumers purchased more

eggs in anticipation of preparing more meals at home.

Consumer demand maintained a steady growth throughout our first three quarters of fiscal 2021 but began trending down during

our fourth quarter of fiscal 2021
 
as consumers started to resume pre-pandemic
 
activities. Our net sales for fiscal 2021 decreased

$2.6 million compared to fiscal 2020,
 
primarily due to the decrease
 
in the selling price and
 
volume of conventional eggs, partially

offset by the increased volume of specialty
 
eggs sold. We
 
believe the decreased demand in foodservice
 
seen throughout the first

three
 
quarters of
 
fiscal 2021
 
due
 
to the
 
pandemic
 
contributed to
 
the depressed
 
price
 
of shell
 
eggs for
 
fiscal 2021
 
in the
 
retail

market due to the extra supply entering the retail channel from the foodservice
 
channel.

For
 
fiscal
 
2022,
 
we
 
believe
 
prices
 
for
 
conventional
 
eggs
 
were
 
positively
 
impacted
 
by
 
a
 
better
 
alignment
 
of
 
the
 
size
 
of
 
the

conventional
 
production
 
layer
 
hen
 
flock
 
and
 
customer
 
and
 
consumer
 
demand
 
through
 
the
 
first
 
three
 
fiscal
 
quarters
 
of
 
2022.

Conventional egg
 
prices further
 
increased in
 
the fourth
 
quarter of
 
fiscal 2022
 
primarily due
 
to decreased
 
supply caused
 
by the

HPAI
 
outbreak
 
compounded
 
with
 
good
 
customer
 
demand.
 
Throughout
 
fiscal
 
2022
 
the
 
hen
 
numbers
 
reported
 
by
 
the
 
USDA

remained below
 
the five-year
 
average. As
 
of July 17,
 
2022, APHIS
 
reported that
 
approximately 30.7
 
million commercial
 
table

egg layer
 
hens, or
 
approximately 9.5%
 
of the
 
table egg
 
layer flock
 
based on
 
February 2022
 
reported layer
 
numbers, have
 
been

depopulated due
 
to HPAI.
 
Hen numbers
 
reported by
 
the USDA
 
as of
 
June 1,
 
2022, were
 
297.5 million,
 
which represents
 
18.3

million fewer hens than a year ago.

According to
 
Information Resources,
 
Inc. (“IRI”),
 
for the
 
52 weeks
 
ended June
 
5, 2022,
 
which approximately
 
aligns with
 
our

fiscal year
 
2022, conventional
 
egg dozens
 
sold in
 
the U.S.
 
at multi-retail
 
outlets decreased
 
14.3%, while
 
specialty egg
 
dozens

sold increased 13.2% versus the prior-year comparable period.
 
Our conventional eggs dozens sold decreased 3.4% and specialty

egg dozens sold increased 12.5% as compared to fiscal 2021.

Gross profit increased $176.4 million to $337.1 million in fiscal 2022. The increase resulted primarily from higher
 
selling prices

for
 
conventional
 
eggs
 
as
 
well
 
as
 
the
 
increased
 
volume
 
of
 
specialty
 
eggs
 
sold,
 
partially
 
offset
 
by
 
the
 
increased
 
cost
 
of
 
feed

ingredients, increased processing costs and the decline in the volume of conventional eggs
 
sold. For fiscal year 2022, the average

Chicago
 
Board
 
of Trade
 
(“CBOT”)
 
daily
 
market
 
price
 
was $6.31
 
per bushel
 
for
 
corn and
 
$392.06
 
per ton
 
for
 
soybean meal,

Table of Contents

25

representing increases of
 
38.3% and 6.1%, respectively,
 
compared to the daily
 
average CBOT prices for fiscal
 
2021. Feed costs

started trending
 
higher midway
 
through the
 
second quarter
 
of fiscal
 
2021 and
 
then again
 
near the
 
end of
 
the second
 
quarter of

fiscal
 
2022.
 
Beginning
 
in
 
August
 
2020,
 
the
 
grain
 
markets,
 
particularly
 
corn,
 
have
 
been
 
negatively
 
affected
 
by
 
many
 
factors,

including weather-related production and yield shortfalls, increased export demand and ongoing disruptions from the COVID-19

global pandemic.
 
These factors continued into our fiscal 2022 and
 
as other factors such as the
 
Russia-Ukraine war, increased fuel

costs, transportation and fertilizers prices
 
and strong export demand and restrictions
 
further compounded the existing issues that

contributed
 
to
 
near-historical
 
low
 
stocks-to-use
 
ratios
 
for
 
corn
 
worldwide
 
and
 
overall
 
higher
 
feed
 
ingredient
 
cost
 
and
 
price

volatility.

We continue
 
to execute our growth strategy of remaining a low-cost provider
 
of shell eggs and growth of our specialty eggs and

egg
 
products
 
through
 
additional
 
investments
 
in
 
cage-free
 
facilities and
 
selective
 
acquisitions.
 
In
 
fiscal
 
2022,
 
we
 
acquired
 
the

remaining 50%
 
membership interest
 
in Red
 
River Valley
 
Egg Farm,
 
LLC (“Red
 
River”), which
 
owns and
 
operates a
 
specialty

shell
 
egg
 
production
 
complex
 
with
 
approximately
 
1.7
 
million
 
cage-free
 
laying
 
hens,
 
cage-free
 
pullet
 
capacity,
 
a
 
feed
 
mill,

processing plant, related offices and outbuildings and related equipment located on approximately 400 acres near Bogata, Texa
 
s.

We
 
also
 
announced
 
new
 
capital
 
projects
 
with
 
estimated
 
costs of
 
$105
 
million
 
that
 
will
 
expand
 
our
 
cage-free
 
production
 
and

capacity by 2.2 million cage-free hens. For additional information,
 
see

Part I. Item 2. Properties.

RESULTS
 
OF OPERATIONS

The following table sets forth, for the fiscal years indicated, certain items from our consolidated
 
statements of income expressed

as a percentage of net sales.

Fiscal Year
 
Ended

May 28, 2022

May 29, 2021

Net sales

100.0

%

100.0

%

Cost of sales

81.0

%

88.1

%

Gross profit

19.0

%

11.9

%

Selling, general and administrative

11.2

%

13.6

%

(Gain) loss on disposal of fixed assets

(0.3)

%

0.2

%

Operating income (loss)

8.1

%

(1.9)

%

Total other income

1.3

%

1.2

%

Income (loss) before income taxes

9.4

%

(0.7)

%

Income tax expense (benefit)

1.9

%

(0.9)

%

Net income

7.5

%

0.2

%

Less:
 
Net loss attributable to noncontrolling interest

—

%

—

%

Net income attributable to Cal-Maine Foods, Inc.

7.5

%

0.2

%

Table of Contents

26

Fiscal Year
 
Ended May 28, 2022 Compared to Fiscal Year
 
Ended May 29, 2021

NET SALES

Total net sales for fiscal
 
2022 were $1,777.2 million compared to $1,349.0 million for fiscal 2021.

Net shell egg sales represented 96.6% and 97.3% of total net sales
 
for the fiscal year 2022
 
and 2021, respectively. Shell egg sales

classified as
 
“Other”
 
represent sales
 
of hard
 
-cooked
 
eggs, hatching
 
eggs, and
 
other miscellaneous
 
products
 
included with
 
our

shell egg operations. The table below presents an analysis of our conventional and specialty shell egg sales (in thousands, except

percentage data):

May 28, 2022

May 29, 2021

Total net sales

$

1,777,159

$

1,348,987

Conventional

$

1,061,995

61.8

%

$

766,284

58.4

%

Specialty

648,838

37.8

%

539,780

41.1

%

Egg sales, net

1,710,833

99.6

%

1,306,064

99.5

%

Other

6,322

0.4

%

6,190

0.5

%

Net shell egg sales

$

1,717,155

100.0

%

$

1,312,254

100.0

%

Dozens sold:

Conventional

747,914

69.0

%

785,446

73.2

%

Specialty

335,875

31.0

%

287,765

26.8

%

Total dozens sold

1,083,789

100.0

%

1,073,211

100.0

%

Net average selling price per dozen:

Conventional

$

1.420

$

0.976

Specialty

$

1.932

$

1.876

All shell eggs

$

1.579

$

1.217

Egg products sales:

Egg products net sales

$

60,004

$

36,733

Pounds sold

63,968

63,627

Net average selling price per pound

$

0.938

$

0.577

Shell egg net sales

-

For fiscal 2022,
 
conventional egg
 
sales increased $295.7
 
million, or 38.6%,
 
compared to
 
fiscal 2021, primarily
 
due to

the increase
 
in conventional
 
egg prices,
 
partially offset
 
by a
 
4.8% decrease
 
in the
 
volume of
 
conventional
 
eggs sold.

Changes in price resulted in a $332.1
 
million increase and change in volume resulted
 
in a $36.6 million decrease in net

sales, respectively.

-

We believe
 
prices for conventional eggs
 
were positively impacted by
 
a better alignment of the
 
size of the conventional

production
 
layer
 
hen
 
flock
 
and
 
customer
 
and
 
consumer
 
demand
 
throughout
 
the
 
first
 
three
 
quarters
 
of
 
fiscal
 
2022.

Conventional egg prices further
 
increased in the fourth quarter
 
of fiscal 2022 primarily due
 
to decreased supply caused

by the HPAI
 
outbreak,
 
discussed above.

-

We believe lower
 
conventional egg prices in the prior-year period were primarily
 
tied to a surplus of conventional eggs

entering the retail channel from the foodservice channel exceeding
 
retail demand during this phase of the pandemic.

-

The decrease
 
in volume of
 
conventional eggs
 
sold was primarily
 
due to elevated
 
retail demand
 
during the
 
first half
 
of

fiscal 2021 given consumers’ preferences
 
to purchase eggs for in-home meal
 
preparation due to the pandemic.
 
We saw

these consumer preferences begin to shift
 
in the fourth quarter of
 
fiscal 2021 as consumers began
 
to resume out-of-home

dining and prepared fewer meals at home.

-

Specialty egg sales
 
increased $109.1 million, or
 
20.2%, for fiscal
 
2022 compared to
 
fiscal 2021, primarily
 
due to a
 
16.7%

increase in the volume of specialty dozens sold and a 3.0% increase in specialty egg prices. Changes in price resulted in

a $18.8 million
 
increase and change
 
in volume
 
resulted in a
 
$90.3 million increase
 
in net
 
sales, respectively. Our specialty

egg sales
 
also benefitted
 
from our
 
additional cage-free
 
production capacity.
 
Cage-free egg
 
sales for
 
fiscal 2022
 
were

22.1% of our total net shell egg sales.

Table of Contents

27

Egg products net sales

-

Egg products
 
net sales increased
 
$23.3 million
 
or 63.4%, primarily
 
due to a
 
62.6% selling
 
price increase
 
compared to

fiscal 2021, which had a $23.1 million positive impact on net sales.

-

Our
 
egg products
 
net average
 
selling
 
price
 
increased
 
in fiscal
 
2022,
 
compared
 
to fiscal
 
2021
 
as foodservice
 
channel

demand has
 
begun to
 
shift more
 
towards pre-pandemic
 
levels. This
 
coincided
 
with the
 
HPAI
 
outbreak
 
that started
 
in

February 2022, in which
 
we believe 10.4 of
 
the 30.7 million culled birds
 
were located at facilities dedicated
 
to support

inline breaking facilities in Iowa.

-

Selling prices for
 
egg products in fiscal
 
2021 were negatively
 
impacted by a
 
decline in foodservice
 
demand during the

more restrictive phases of governmental and business shutdowns due to the pandemic.

COST OF SALES

Cost of sales for fiscal 2022 were $1,440.1 million compared to $1,188.3
 
million for fiscal 2021.

Cost of
 
sales consi
 
sts of
 
costs directly
 
related
 
to producing,
 
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 (in thousands,
 
except cost per dozen data):

Fiscal Year
 
Ended

May 28, 2022

May 29, 2021

% Change

Cost of Sales:

Farm production

$

927,806

$

730,902

26.9

%

Processing, packaging, and warehouse

289,056

250,058

15.6

Egg purchases and other (including change in inventory)

172,034

177,634

(3.2)

Total shell eggs

1,388,896

1,158,594

19.9

Egg products

51,204

29,536

73.4

Other

—

196

(100.0)

Total

$

1,440,100

$

1,188,326

21.2

%

Farm production costs (per dozen produced)

Feed

$

0.571

$

0.446

28.0

%

Other

$

0.352

$

0.320

10.0

%

Total

$

0.923

$

0.766

20.5

%

Outside egg purchases (average cost per dozen)

$

1.72

$

1.22

41.0

%

Dozens produced

1,022,327

970,837

5.3

%

Percent produced to sold

94.3%

90.5%

4.2

%

Farm Production

-

Feed costs
 
per dozen
 
produced increased
 
28.0% in
 
fiscal 2022
 
compared to
 
fiscal 2021,
 
primarily due
 
to higher
 
feed

ingredient prices,
 
discussed above.

-

Other
 
farm
 
production
 
costs increased
 
due
 
to higher
 
flock amortization,
 
primarily
 
from an
 
increase
 
in
 
our
 
cage-free

production, which has higher capitalized costs. Also, higher feed costs, which began to rise in our third quarter of fiscal

2021, are capitalized in our flocks during pullet production and increased our
 
amortization expense.

-

We had higher
 
facility expense as more cage-free facilities came into production.

Processing, packaging, and warehouse

-

Cost of packaging materials increased 11.9% compared to fiscal 2021 as supply chain constraints initially caused by the

pandemic
 
increased
 
costs
 
for
 
packaging
 
products
 
and
 
manufacturers
 
implemented
 
pandemic
 
surcharges.
 
Costs
 
also

increased due to rising inflation.

-

Labor costs increased 14.4% due to wage increases in response to
 
labor shortages, primarily due to the pandemic and its

effects.

-

Dozens processed increased 5.0% compared to fiscal 2021, which resulted
 
in an $11.4 million increase in costs.

Table of Contents

28

Egg purchases and other (including change in inventory)

-

Costs in this category decreased primarily due to the decrease in the volume of
 
outside egg purchases, as our percentage

of produced to sold increased to 94.3% in fiscal 2022 from 90.5% in fiscal 2021,
 
partially offset by higher egg prices.

Looking
 
forward
 
to
 
fiscal
 
2023,
 
market
 
indications
 
point
 
to
 
higher
 
corn
 
and
 
soybean
 
prices and
 
greater
 
volatility
 
tied
 
to
 
the

Russia-Ukraine war and higher export demand.

GROSS PROFIT

Gross profit,
 
as a percentage
 
of net sales,
 
was 19.0% for
 
fiscal 2022,
 
compared to 11.9%
 
for fiscal 2021.
 
The increase resulted

primarily from higher selling prices for conventional eggs as well as the increased volume of
 
specialty eggs sold, partially offset

by the increased cost of feed ingredients,
 
increased processing costs and the decline in the volume of conventional eggs sold.

SELLING, GENERAL, AND ADMINISTRATIVE
 
EXPENSES

Selling,
 
general,
 
and
 
administrative
 
expenses
 
("SGA")
 
include
 
costs
 
of
 
marketing,
 
distribution,
 
accounting,
 
and
 
corporate

overhead. SG&A increased $14.7
 
million to $198.6 million
 
in fiscal 2022. The following
 
table presents an analysis of
 
our SGA

expenses (in thousands):

Fiscal Year
 
Ended

May 28, 2022

May 29, 2021

$ Change

% Change

Specialty egg expense

$

59,830

$

59,294

$

536

0.9

%

Delivery expense

62,677

52,670

10,007

19.0

%

Payroll, taxes and benefits

43,954

43,327

627

1.4

%

Stock compensation expense

4,063

3,778

285

7.5

%

Other expenses

28,107

24,874

3,233

13.0

%

Total

$

198,631

$

183,943

$

14,688

8.0

%

Specialty egg expense

-

Specialty egg
 
expense which
 
includes franchise
 
fees, advertising
 
and promotion
 
costs generally
 
tracks with
 
specialty

egg
 
volumes,
 
which
 
were
 
up
 
16.7%
 
for
 
fiscal
 
2022
 
compared
 
to
 
fiscal
 
2021.
 
However,
 
our
 
specialty
 
egg
 
expense

increased
 
only
 
0.9%,
 
primarily
 
due
 
to
 
increased
 
sales
 
to
 
other
 
Eggland’s
 
Best,
 
Inc.
 
(“EB”)
 
franchisees,
 
including

unconsolidated
 
affiliates,
 
Specialty
 
Eggs,
 
LLC
 
and
 
Southwest
 
Specialty
 
Eggs,
 
LLC,
 
that
 
were
 
responsible
 
for
 
the

franchise fees,
 
advertising and
 
promotion costs
 
associated with
 
those sales
 
resulting in
 
reduced costs
 
for us.
 
Also, the

strong conventional market diminished
 
the need to promote specialty eggs;
 
and as a result, EB temporarily
 
reduced the

related franchise fees for certain specialty egg products to encourage
 
continued production of these products.

Delivery expense

-

The increased
 
delivery expense
 
is primarily
 
due to
 
the increase
 
in fuel
 
and labor
 
costs for
 
both our
 
fleet and
 
contract

trucking.

Other expenses

-

The increase
 
in other expenses
 
is primarily due
 
to property losses
 
incurred that
 
were not covered
 
by insurance
 
as well

as increased
 
premiums
 
for
 
property
 
and casualty
 
insurance programs.
 
We
 
also
 
accrued an
 
additional
 
$1.1 million
 
in

property taxes due to the Red River acquisition.

OPERATING
 
INCOME (LOSS)

As a result
 
of the above,
 
our operating
 
income was $143.5 million
 
for fiscal 2022,
 
compared to operating
 
loss of $26.3 million

for fiscal 2021.

OTHER INCOME (EXPENSE)

Total
 
other
 
income
 
(expense)
 
consists
 
of
 
items
 
not
 
directly
 
charged
 
to,
 
or
 
related
 
to,
 
operations
 
such
 
as
 
interest
 
income
 
and

expense, equity in income or loss of unconsolidated entities, and patronage dividends,
 
among other items.

Table of Contents

29

The Company
 
recorded interest income
 
of $988 thousand
 
in fiscal 2022,
 
compared to $2.8
 
million in
 
fiscal 2021. We
 
recorded

interest expense of $403 thousand and $213 thousand
 
in fiscal 2022 and 2021, respectively, primarily related to commitment fees

on our Credit Facility described below.

Patronage
 
dividends,
 
which
 
represent
 
distributions
 
from
 
our
 
membership
 
in
 
EB,
 
increased
 
$1.1
 
million
 
or
 
12.5%.
 
Patronage

dividends are paid once a year based on EB’s
 
profits and its available cash.

Equity in income
 
from unconsolidated entities
 
for fiscal 2022 was
 
$1.9 million compared
 
to $622 thousand for
 
fiscal 2021, due

to increased specialty
 
egg prices
 
as well
 
as increased sales
 
volume resulting from
 
our additional investment
 
in Southwest
 
Specialty

to expand its operations.

Other,
 
net for fiscal
 
2022 was
 
income of
 
$9.8 million compared
 
to $4.1 million
 
for fiscal 2021.
 
The majority of
 
the increase is

due to our
 
acquisition of the
 
remaining 50% membership
 
interest in Red
 
River as we
 
recognized a
 
$4.5 million
 
gain due to
 
the

remeasurement of
 
our equity investment,
 
along with the
 
$1.6 million payments
 
related to review
 
and adjustment of
 
our various

marketing agreements.

INCOME TAXES

For the
 
fiscal year
 
ended May
 
28, 2022,
 
our pre-tax
 
income was
 
$166.0 million,
 
compared to
 
pre-tax loss
 
of $9.9
 
million for

fiscal 2021. Income
 
tax expense of
 
$33.6 million was
 
recorded for fiscal
 
2022 with an
 
effective tax rate
 
of 20.2%.
 
Included in

fiscal 2022
 
income tax
 
expense is
 
the discrete
 
tax benefit
 
of $8.3
 
million discussed
 
in

Note 2 – Acquisition

of Part
 
II. Item
 
8.

Notes to
 
Condensed
 
Consolidated
 
Financial
 
Statements in
 
this Annual
 
Report.
 
Excluding the
 
discrete tax
 
benefit,
 
income tax

expense was $41.9
 
million with an
 
adjusted effective
 
tax rate of
 
25.2%. For
 
fiscal 2021, income
 
tax benefit was
 
$12.0 million.

Excluding the impact
 
of discrete items
 
related to a
 
$12.4 million net
 
tax benefit recorded
 
during fiscal 2021
 
in connection with

the Coronavirus Aid,
 
Relief, and Economic Security
 
Act (the “CARES Act”),
 
our income tax benefit
 
for the comparable period

of fiscal 2021 was $2.2 million, which reflects an adjusted effective
 
tax rate of 22.7%.

At May 28, 2022, the
 
Company had an income tax
 
receivable of $42.1 million compared
 
to $42.5 million at May 29,
 
2021. The

income tax receivable is related
 
to the Company’s
 
decision to carryback fiscal 2020
 
and fiscal 2021 taxable net operating
 
losses

to recover a
 
portion of taxes paid
 
in fiscal 2015
 
and fiscal 2016.
 
During fiscal 2022,
 
the Company filed
 
both federal carryback

tax returns,
 
and we believe we will receive the refunds during our third fiscal quarter of 2023.

Items causing
 
our effective
 
tax rate
 
to differ
 
from the
 
federal statutory
 
income tax
 
rate of
 
21% are
 
state income
 
taxes, certain

federal tax
 
credits 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, certain
 
nondeductible expenses,
 
and net income

or loss attributable to noncontrolling interest.

NET LOSS ATTRIBUTABLE
 
TO NONCONTROLLING INTEREST

Net loss attributable
 
to noncontrolling interest was
 
$209 thousand for fiscal
 
2022 compared to
 
no such income or
 
loss for fiscal

2021.

NET INCOME ATTRIBUTABLE
 
TO CAL-MAINE FOODS, INC.

As a result of the above, net
 
income attributable to Cal-Maine Foods, Inc.
 
for fiscal 2022 was $132.7 million, or $2.73
 
per basic

and $2.72 per diluted share, compared to $2.1 million, or $0.04
 
per basic and diluted share for fiscal 2021.

Fiscal Year
 
Ended May 29, 2021 Compared to Fiscal Year
 
Ended May 30, 2020

The discussion
 
of our
 
results of
 
operations for
 
the fiscal
 
year ended
 
May 29,
 
2021 compared
 
to the
 
fiscal year
 
ended May
 
30,

2020 can be found in Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results
 
of Operations in

the Company's fiscal 2021 Annual Report on Form 10-K.

LIQUIDITY AND CAPITAL
 
RESOURCES

Working
 
Capital and Current Ratio

Our
 
working
 
capital
 
at
 
May
 
28,
 
2022
 
was
 
$476.8 million,
 
compared
 
to
 
$429.8 million
 
at
 
May
 
29,
 
2021.
 
The
 
calculation
 
of

working capital is defined
 
as current assets less current
 
liabilities. Our current ratio was
 
3.58 at May 28, 2022
 
compared to 5.77

Table of Contents

30

at May 29, 2021. The current ratio is
 
calculated by dividing current assets by current liabilities. Due to seasonal factors described

in

Part I. Item I. Business – Seasonality

, we
 
generally expect
 
our need
 
for working
 
capital to
 
be highest
 
in the
 
fourth and
 
first

fiscal quarters ending in May/June and August/September,
 
respectively.

Cash Flows from Operating Activities

Net cash
 
provided by
 
operating activities
 
was $126.2
 
million for
 
fiscal year
 
2022 compared
 
with $26.1 million
 
for fiscal
 
year

2021.
 
The increase in cash flow from operations
 
resulted primarily from higher selling prices for conventional eggs
 
as well as the

increased volume of
 
specialty eggs, partially
 
offset by
 
the increased cost
 
of feed ingredients
 
and processing costs.
 
The increase

in accounts payables,
 
accrued expenses and
 
other liabilities is
 
primarily due
 
to $62.3 million
 
balance for dividends
 
and income

tax payables as of May 28, 2022.

Cash Flows from Investing Activities

We
 
continue
 
to
 
invest
 
in
 
our
 
facilities,
 
with
 
$72.4
 
million
 
used
 
to
 
purchase
 
property,
 
plant
 
and
 
equipment
 
for
 
fiscal
 
2022,

compared to
 
$95.1 million
 
in fiscal
 
2021. Proceeds from
 
the sale
 
of property,
 
plant and
 
equipment was
 
$8.3 million
 
for fiscal

2022, compared to $3.4 million for in fiscal 2021. We also acquired the remaining 50% membership interest in Red River during

our first quarter of fiscal
 
2022 for $44.8 million, net
 
of cash acquired. Purchases of
 
investments were $98.2 million in fiscal
 
2022,

compared
 
to
 
$88.3
 
million
 
in
 
fiscal
 
2021.
 
Sales
 
and
 
maturities
 
of
 
investment
 
securities
 
were
 
$92.7
 
million
 
for
 
fiscal
 
2022,

compared to $129.1 million for fiscal
 
2021. We received $400 thousand in distributions from unconsolidated entity in
 
fiscal 2022

compared to $6.7 million for fiscal 2021.

Cash Flows from Financing Activities

We
 
paid dividends
 
totaling $6.1 million
 
and $1.7 million
 
in fiscal 2022
 
and 2021, respectively.
 
Purchases of common
 
stock by

treasury of $1.1
 
million and $871
 
thousand were made
 
to satisfy tax
 
withholding obligations
 
for employees
 
in connection with

the vesting of restricted common stock. Cash payments of $215 thousand
 
and $205 thousand were made on our finance lease.

As of May 28, 2022,
 
cash increased $1.7 million since
 
May 29, 2021, compared to a
 
decrease of $20.8 million during fiscal
 
2021.

Credit Facility

We had no
 
long-term debt outstanding at the end of fiscal 2022
 
and 2021. On November 15, 2021, we entered
 
into an Amended

and Restated Credit Agreement (the “Credit Agreement”) with a five-year term. The Credit Agreement amended and restated the

Company’s
 
previously
 
existing credit
 
agreement dated
 
July 10,
 
2018. The
 
Credit Agreement
 
provides for
 
an increased
 
senior

secured revolving credit facility (the “Credit Facility”), in an initial aggregate principal amount of up to $250 million. As of May

28, 2022,
 
no amounts
 
were borrowed
 
under the
 
Credit Facility.
 
We
 
have $4.1
 
million in
 
outstanding standby
 
letters of
 
credit,

which were issued under our Credit
 
Facility for the benefit of
 
certain insurance companies. Refer to
 
Part II. Item 8. Notes to
 
the

Financial Statements,

Note 10 – Credit Facility

for further information regarding our long-term debt.

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31

Material Cash Requirements

Material cash requirements for
 
operating activities consist of
 
feed ingredients, employee related
 
costs, and other general
 
operating

expenses, which we expect to be paid from our cash from operations.

We
 
continue
 
to monitor
 
the increasing
 
demand for
 
cage-free eggs
 
and to
 
engage with
 
our customers
 
in an
 
effort
 
to achieve
 
a

smooth transition
 
to meet
 
their announced
 
commitment timeline
 
for cage-free
 
egg sales. As
 
of May
 
28, 2022,
 
we had
 
invested

approximately $516 million
 
in facilities, equipment
 
and related operations
 
to expand our
 
cage-free production starting
 
with our

first facility in 2008. The following table
 
presents current material construction projects approved as of
 
May 28, 2022, along with

our $55.3
 
million capital
 
project approved
 
subsequent to
 
the end
 
of the
 
fourth quarter
 
2022 to
 
convert existing
 
capacity at
 
our

Chase, Kansas production facility to house approximately
 
1.5 million cage-free hens and include
 
remodels of all remaining pullet

facilities (in thousands):

Project(s) Type

Projected

Completion

Projected Cost

Spent as of

May 28, 2022

Remaining

Projected Cost

Cage-Free Layer & Pullet Houses/Processing

Facility

Fiscal 2023

$

131,974

$

113,386

$

18,588

Cage-Free Layer & Pullet Houses

Fiscal 2023

24,171

14,201

9,970

Cage-Free Layer & Pullet Houses

Fiscal 2024

42,591

107

42,484

Cage-Free Layer & Pullet Houses

Fiscal 2025

94,183

144

94,039

$

292,919

$

127,838

$

165,081

For additional information, see

Part I. Item 2. Properties.

The following table summarizes by fiscal year the
 
future estimated cash

payments,
 
in
 
thousands,
 
to
 
be
 
made
 
under
 
existing
 
contractual
 
obligations
 
as
 
of
 
May
 
28,
 
2022.
 
Further
 
information
 
on
 
debt

obligations is contained in

Note 10 – Credit Facility

, and on lease obligations in

Note 15 – Leases

, each in Part II. Item 8.
 
Notes

to the Consolidated Financial Statements. As of May 28, 2022,
 
we had no outstanding long-term debt.

Payments due by period

Total

Less than

1 year

1-3

years

3-5

years

More than

5 years

Finance leases

$

457

$

239

$

218

$

—

$

—

Operating leases

1,080

539

536

5

—

Purchase obligations:

Feed ingredients

(a)

172,132

172,132

—

—

—

Construction contracts and other equipment

27,568

19,281

8,287

—

—

Total

$

201,237

$

192,191

$

9,041

$

5

$

—

(a)

Actual purchase obligations may change based on the contractual terms and
 
agreements

We believe our
 
current cash balances, investments, cash flows from operations, and
 
Credit Facility will be sufficient to fund our

capital needs for at least the next 12 months.

IMPACT OF
 
RECENTLY
 
ISSUED ACCOUNTING STANDARDS

For information on changes in accounting
 
principles and new accounting principles,
 
see “

New Accounting Pronouncements
 
and

Policies

” in Part II. Item 8. Notes to Consolidated Financial Statements,

Note 1 - Summary of Significant Accounting Policies

.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with U.S. GAAP 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. Critical accounting estimates are
 
those

estimates made in
 
accordance with GAAP
 
that involve a
 
significant level of estimation
 
uncertainty and have had
 
or are reasonably

likely to have a material impact
 
on the financial condition or results
 
of operations. Our critical accounting estimates are described

below.

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32

BUSINESS COMBINATION
 
S

The Company applies the acquisition
 
method of accounting, which
 
requires that once control is
 
obtained, all the assets acquired

and liabilities assumed,
 
including amounts
 
attributable to noncontrolling
 
interests, are recorded
 
at their respective
 
fair values at

the
 
date
 
of acquisition.
 
The
 
excess
 
of
 
the
 
purchase
 
price
 
over
 
fair
 
values
 
of
 
identifiable
 
assets
 
and
 
liabilities
 
is
 
recorded
 
as

goodwill.

We
 
typically
 
use the
 
income method
 
approach for
 
intangible assets
 
acquired
 
in a
 
business combination.
 
Significant
 
judgment

exists in valuing certain
 
intangible assets. and the
 
most significant assumptions requiring judgment
 
involve estimating the
 
amount

and timing of
 
future cash flows,
 
growth rates,
 
discount rates selected
 
to measure
 
the risks inherent
 
in the future
 
cash flows and

the asset’s expected useful lives.

The fair values of
 
identifiable assets and liabilities
 
is determined internally and requires
 
estimates and the use
 
of various valuation

techniques. When a market value
 
is not readily available, our internal
 
valuation methodology considers the
 
remaining estimated

life of the assets acquired and significant judgment is required as management
 
determines the fair market value for those assets.

Due
 
to
 
inherent
 
industry
 
uncertainties
 
including
 
volatile
 
egg
 
prices
 
and
 
feed
 
costs,
 
unanticipated
 
market
 
changes,
 
events,
 
or

circumstances may occur that could affect the estimates and assumptions
 
used, which could result in subsequent impairments.

INVENTORIES

Inventories of eggs, feed,
 
supplies and flocks
 
are valued principally
 
at the lower
 
of cost (first-in,
 
first-out method) or net
 
realizable

value. If
 
market
 
prices
 
for
 
eggs and
 
feed
 
grains
 
move
 
substantially
 
lower,
 
we
 
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 flock’s productive
 
life, generally one to two years. Judgment exists in

determining
 
the flock’s
 
productive life
 
including
 
factors such
 
as laying
 
rate and
 
egg size,
 
molt cycles,
 
and customer
 
demand.

Furthermore, other factors such as
 
hen type or weather conditions could affect
 
the productive life. These factors could
 
make our

estimates of productive life differ from actual results. Flock mortality is charged to cost of sales as incurred. High mortality from

disease or extreme temperatures will
 
result in abnormal write-downs to
 
flock inventories. Management continually monitors each

flock and attempts to take appropriate actions to minimize the risk of mortality
 
loss.

GOODWILL

As a
 
result of
 
acquiring
 
businesses, the
 
Company
 
has $44.0
 
million
 
of goodwill
 
on May
 
28, 2022.
 
Goodwill is
 
evaluated
 
for

impairment
 
annually
 
by
 
first
 
performing
 
a
 
qualitative
 
assessment
 
to
 
determine
 
whether
 
a
 
quantitative
 
goodwill
 
test
 
is

necessary. After
 
assessing the totality of events or
 
circumstances, if we determine it
 
is more likely than not that the
 
fair value of

a reporting unit is less than its carrying
 
amount, then we perform additional quantitative tests to
 
determine the magnitude of any

impairment.

The
 
Company
 
has
 
determined
 
that
 
all
 
of
 
our
 
locations
 
share
 
similar
 
economic
 
characteristics
 
and
 
support
 
each
 
other
 
in
 
the

production of eggs and customer support. Therefore, we aggregate all our locations as a single reporting unit for testing goodwill

for
 
impairment.
 
When
 
the
 
Company
 
acquires
 
a
 
new
 
location,
 
we
 
determine
 
whether
 
it
 
should
 
be
 
integrated
 
into
 
our
 
single

reporting unit or
 
treated as a
 
separate reporting unit. Historically, we
 
have concluded that
 
acquired operations should be
 
integrated

into our single reporting unit due to the operational changes, redistribution of customers, and significant changes in management

that occur when we acquire businesses, which result in the acquired operations sharing
 
similar economic characteristics with the

rest of our locations. Once goodwill associated with acquired operations becomes part of goodwill of our single reporting unit, it

no longer represents the particular
 
acquired operations that gave rise to the
 
goodwill. We
 
may conclude that a business acquired

in the future should be treated as a separate reporting unit, in which case it would be tested separately
 
for goodwill
 
impairment.

At May 28, 2022, goodwill represented 3.1% of total assets and 2.9% of
 
stockholders’ equity.

Judgment exists in management’s evaluation
 
of the qualitative factors which include macroeconomic conditions, the current egg

industry environment,
 
cost inputs such as
 
feed ingredients and overall financial performance. Furthermore, judgment
 
exists in the

evaluation
 
of the
 
threshold of
 
whether it
 
is more
 
likely than
 
not that
 
the fair
 
value of
 
a reporting
 
unit is
 
less than
 
its carrying

amount. Uncertainty exists due to uncontrollable events that could occur
 
that could negatively affect our operating conditions.

During our
 
annual impairment
 
test in fiscal
 
2022, we
 
determined that
 
goodwill passed
 
the qualitative
 
assessment and
 
therefore

no quantitative analysis of goodwill impairment was necessary.

Table of Contents

33

REVENUE RECOGNITION

Revenue recognition is completed upon satisfaction of the performance obligation to the customer, which typically occurs within

days of the Company and customer
 
agreeing upon the order.
 
See

Note 14 – Revenue Recognition

in Part II. Item 8. Notes to the

Consolidated Financial Statements for further discussion of the policy.

The Company believes
 
the performance obligation
 
is met upon delivery
 
and acceptance of
 
the product by
 
our customers. Costs

to deliver
 
product to
 
customers are
 
included in selling,
 
general and
 
administrative expenses
 
in the
 
accompanying Consolidated

Statements
 
of
 
Income. Sales
 
revenue
 
reported
 
in
 
the
 
accompanying
 
Consolidated
 
Statements
 
of
 
Income
 
is
 
reduced
 
to
 
reflect

estimated returns
 
and allowances. The
 
Company records
 
an estimated
 
sales allowance
 
for returns
 
and discounts
 
at the
 
time of

sale using historical trends based on actual sales returns and sales.

The Company periodically provides
 
incentive offers to its
 
customers to encourage purchases.
 
Such offers include current
 
discount

offers (e.g., percentage discounts off current purchases), inducement
 
offers (e.g., offers for future discounts
 
subject to a minimum

current purchase), and other similar offers. Current discount offers, when accepted by customers, are treated as a reduction to the

sales price
 
of the
 
related transaction,
 
while inducement
 
offers, when
 
accepted by
 
customers, are
 
treated as
 
a reduction
 
to sales

price based on estimated future redemption rates.
 
Redemption rates are estimated using the Company’s
 
historical experience for

similar inducement offers. Current discount and inducement offers
 
are presented as a net amount in ‘‘Net
 
sales.’’

As the
 
estimates noted
 
above are
 
based on
 
historical information,
 
we do
 
not believe
 
that there
 
will be
 
a material
 
change in
 
the

estimates and assumptions used
 
to recognize revenue. However,
 
if actual results varied significantly
 
from our estimates it could

expose us to material gains or losses.

LOSS CONTINGENCIES

The Company evaluates
 
whether a loss contingency
 
exists, and if the
 
assessment of a contingency
 
indicates it is probable
 
that a

material loss has
 
been incurred and
 
the amount of
 
the loss can
 
be reasonably estimated,
 
the estimated loss
 
would be accrued
 
in

the Company’s financial statements.
 
The Company expenses the costs of litigation as they are incurred.

There
 
were
 
no
 
loss
 
contingency
 
reserves
 
for
 
the
 
past
 
three
 
fiscal
 
years.
 
Our
 
evaluation
 
of
 
whether
 
loss
 
contingencies
 
exist

primarily relates to
 
litigation matters. The
 
outcome of litigation
 
is uncertain due
 
to, among other
 
things, uncertainties regarding

the facts will be established
 
during the proceedings, uncertainties
 
regarding how the law will
 
be applied to the facts
 
established,

and uncertainties
 
regarding the
 
calculation of
 
any potential
 
damages or
 
the costs
 
of any
 
potential injunctive
 
relief. If
 
the facts

discovered or the Company’s
 
assumptions change, future reserves for
 
loss contingencies may be required.
 
Results of operations

may be materially affected by losses or a loss contingency reserve
 
resulting from adverse legal proceedings.

INCOME TAXES

We
 
determine our
 
effective tax
 
rate by estimating
 
our permanent differences
 
resulting from differing
 
treatment of items
 
for tax

and accounting purposes. Judgment and uncertainty exist with management’s application of tax regulations
 
and evaluation of the

more-likely-than-not recognition and measurement thresholds. We
 
are periodically audited by taxing authorities. An adverse tax

settlement could have a negative impact on our effective tax rate
 
and our results of operations.

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