Business context and reporting period
Cal-Maine Foods, Inc. (NASDAQ: CALM), the largest U.S. shell-egg producer and distributor, filed this Form 10-K for fiscal 2020, the 52 weeks ended May 30, 2020. The filing also reports fourth-quarter results for the 13 weeks ended May 30, 2020. Although the request metadata says “2019 Q4,” the filing period is fiscal 2020, with the fourth quarter in 2020. The company operates as one segment and sold about 1.069 billion dozen shell eggs during the year.
Financial performance and condition
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $1,351.6 million | $1,361.2 million |
| Gross profit / margin | $179.6 million / 13.3% | $222.9 million / 16.4% |
| Operating income | $1.3 million | $45.8 million |
| Net income attributable to Cal-Maine | $18.4 million; $0.38 per diluted share | $54.2 million; $1.12 per diluted share |
| Operating cash flow | $73.6 million | $115.1 million |
FY2020 cost of sales was $1,172.0 million. Feed cost was $0.409 per dozen produced, down from $0.415. The filing reports shell-egg sales of $1,320.2 million; conventional eggs accounted for $830.3 million and specialty eggs for $485.5 million. Egg-product revenue was $31.4 million.
At May 30, 2020, cash and cash equivalents were $78.1 million, current available-for-sale investments were $154.2 million, working capital was $429.1 million, and the current ratio was 5.6. Long-term debt was fully repaid during the year; no borrowings were outstanding under the $100 million revolving facility, though $4.3 million of standby letters of credit used it. Stockholders’ equity was $1,009.7 million. Capital expenditures were $124.2 million. No dividend was paid in FY2020; the company reported $1.4 million of cumulative losses to recover before dividends resume under its policy.
Changes versus the prior comparable period
- Sales declined 0.7%, while gross profit fell 19.4% and operating income dropped from $45.8 million to $1.3 million. Net income attributable to the company decreased 66.1%.
- Total dozens sold increased 2.9%, but average shell-egg selling price fell 2.7% to $1.231 per dozen. Conventional prices were pressured by oversupply during the first three quarters; fourth-quarter demand surged amid COVID-19-related household purchasing.
- Specialty-egg volume and revenue declined, while conventional volume increased. Egg-product revenue fell 24.3% despite an 8.4% increase in pounds sold, reflecting lower prices and reduced fourth-quarter food-service demand.
- Operating cash flow decreased by $41.5 million. Working capital fell from $492.8 million to $429.1 million, and the current ratio declined from 7.6 to 5.6.
Outlook, commentary, risks and unusual items
Management provided no specific numerical earnings or revenue guidance. It said current cash, investments, operating cash flows and the revolving facility should fund projected needs for at least the next 12 months. Management expected adequate corn and soybean supplies for FY2021 but noted COVID-19, weather, trade and supply-chain uncertainty could drive price volatility. Approved construction projects had $46.4 million of remaining projected costs, mainly for cage-free and convertible facilities, with expected completion in FY2021 and FY2022.
- COVID-19: The pandemic sharply increased fourth-quarter conventional-egg prices and retail demand, while food-service demand weakened. The company incurred $2.8 million in pandemic-related costs, mainly supplemental employee pay and labor. A $2.4 million income-tax benefit was recorded under CARES Act loss-carryback provisions; management estimated a further tax refund of about $6.9 million.
- Acquisitions and assets: The company acquired Mahard Egg Farm assets for $45.5 million in October 2019, adding capacity and facilities, and acquired the remaining 6.8% interest in Texas Egg Products in March 2020. A $2.9 million non-cash fixed-asset impairment related to decommissioning older facilities was included in cost of sales.
- Market and operating risks: Egg prices are volatile and cyclical; feed is a major cost and the company generally does not hedge corn or soybean meal. Cage-free conversion requires investment and carries demand and cost uncertainty. Sales are concentrated: Walmart and Sam’s Club represented 32.1% of revenue, and the top three customers 51.1%.
- Litigation: The company faces consumer and state claims alleging excessive egg prices during the COVID-19 emergency; management assessed material-loss risk in those matters as remote. A remaining processed-egg antitrust case could have a material adverse outcome, but the company said exposure could not be estimated. Kellogg claims were settled for an amount not material to financial condition or results.
- Other exposures: Risks include avian disease, product contamination and recalls, severe weather, labor availability and costs, regulatory and environmental requirements, and the controlled-company structure. The company does not maintain insurance for product-recall losses.
The independent auditor gave an unqualified opinion on the financial statements and on internal control over financial reporting. Litigation and claims were identified as a critical audit matter.
Most important facts for investors to verify
- Confirm the applicable period: the filing covers FY2020 ended May 30, 2020, not fiscal 2019 Q4.
- Track egg-price and feed-cost trends, including whether fourth-quarter demand and pricing persisted after the pandemic-related spike.
- Assess customer commitments, cage-free demand, construction spending and the risk that production capacity may not match future demand.
- Monitor the remaining processed-egg antitrust litigation and COVID-era pricing claims, including any subsequent developments or quantified exposure.
- Verify the expected CARES Act tax refund and the timing and amount of any future dividends.
- Reconcile an apparent filing inconsistency: the MD&A expense detail lists FY2020 selling, general and administrative expenses as $178.2 million, while the consolidated income statement reports $176.2 million.