Cal-Maine Foods, Inc. — Fiscal 2020 Second-Quarter Form 10-Q
Reporting period: The 13 weeks ended November 30, 2019, compared with the 13 weeks ended December 1, 2018. Year-to-date comparisons cover 26 weeks. Amounts below are in millions of dollars, except per-share data, percentages, and where noted.
Financial results
| Metric | 13 weeks ended Nov. 30, 2019 | 13 weeks ended Dec. 1, 2018 | 26 weeks ended Nov. 30, 2019 | 26 weeks ended Dec. 1, 2018 |
|---|---|---|---|---|
| Net sales | $311.5 | $356.0 | $552.7 | $696.6 |
| Gross profit (margin) | $29.4 (9.4%) | $70.5 (19.8%) | $8.3 (1.5%) | $127.7 (18.3%) |
| Operating income (loss) | $(16.6) (-5.4%) | $25.3 (7.1%) | $(80.0) (-14.5%) | $38.0 (5.5%) |
| Net income (loss) attributable to Cal-Maine | $(10.1) | $21.8 | $(55.8) | $34.2 |
| Diluted EPS | $(0.21) | $0.45 | $(1.15) | $0.71 |
Cash flow and liquidity: First-half operating cash flow was $(74.3), versus $27.7 provided a year earlier. Investing activities provided $18.6, including $137.2 in investment-security sales and maturities, offset partly by $68.1 of property and equipment purchases and $44.5 paid for the Mahard acquisition. Cash declined $58.0 from fiscal year-end to $11.2. At November 30, working capital was $346.0 and the current ratio was 4.36, compared with $492.8 and 7.58 at June 1, 2019. Cash and current investment securities totaled approximately $134.5.
Debt: The company retired its remaining long-term debt during the quarter; no long-term debt or revolver borrowings remained at November 30. Its $100 million revolving facility was undrawn, with $4.2 million of standby letters of credit outstanding. Finance and operating lease obligations were reported separately.
Material changes and operating drivers
- Second-quarter sales fell 12.5%; first-half sales fell 20.7%. Management attributed the declines principally to lower egg prices. Average shell-egg selling price per dozen fell 11.5% in the quarter and 20.6% year to date, while total dozens sold were down 0.5% in the quarter and up 0.6% year to date.
- Non-specialty egg prices were especially weak: average selling price per dozen declined 14.6% in the quarter and 29.2% year to date. Specialty volumes also declined, and specialty average prices were lower. Egg-products sales decreased 29.6% in the quarter and 35.2% year to date, despite higher pounds sold, as selling prices fell.
- Cost of sales decreased less than sales, and farm production costs rose as production volumes and non-feed costs increased. Other farm production cost per dozen rose 5.2% in the quarter; management cited accelerated flock amortization from early flock sales and higher labor costs. First-half results included a $2.9 million noncash fixed-asset impairment related to decommissioning older facilities.
- The company acquired Mahard Egg Farm assets on October 20, 2019 for approximately $45.5 million, including $44.5 million cash consideration and a possible additional $1.0 million subject to post-closing covenants. The acquisition added facilities with capacity for approximately 3.9 million laying hens and permitted capacity up to 8.0 million; Cal-Maine’s ownership of Texas Egg Products increased to 93.2%.
Outlook, risks, and other notable items
- No specific earnings or revenue guidance was provided. Management said rising hen numbers and egg oversupply could continue to pressure market prices. It cited 340.5 million hens, 4.6 million more than a year earlier, based on USDA data reported as of December 23, 2019.
- Management expected adequate corn and soybean supplies for fiscal 2020 but warned that trade and tariff uncertainty could increase feed-price volatility. Egg prices and feed costs are major commodity risks; the company generally does not hedge or use long-term corn and soybean meal purchase contracts.
- The company continued cage-free expansion. Approved projects totaled $154.7 million, of which $51.4 million had been spent and $103.4 million remained; projected completion dates run through fiscal 2022. Management said current cash, investments, operating cash flows, and the revolver should fund projected needs for at least 12 months. Project execution, demand estimation, and the higher cost of cage-free production remain risks.
- Cal-Maine’s dividend policy generally provides for one-third of quarterly GAAP net income, subject to cumulative profitability. No dividends were paid in the first half; cumulative losses of $75.6 million had to be recovered before a dividend could be paid.
- In the egg antitrust litigation, Kellogg claims were settled on terms described as immaterial, but claims by Kraft, General Mills, and Nestlé remained. The company said a material adverse outcome was reasonably possible, while the amount of exposure could not be estimated. It intends to defend the case.
- A $1.5 million state income-tax benefit from a refund claim contributed to the quarter’s tax benefit. The company adopted the lease accounting standard in fiscal 2020 and said adoption did not materially affect its financial statements.
Most important facts for investors to verify
- Whether egg supply, market pricing, and the specialty-egg price and volume trends improve or deteriorate.
- Whether operating cash flow recovers and planned capital expenditures remain financeable while cash is substantially lower than at fiscal year-end.
- Mahard integration, expected production and cost efficiencies, and the possible additional $1.0 million payment.
- Progress, remaining costs, and customer demand supporting the cage-free construction program.
- Developments and potential exposure in the remaining egg antitrust claims, which management could not quantify.