Cal-Maine Foods, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first 26 weeks of fiscal 2018, ended December 2, 2017; comparisons are to periods ended November 26, 2016. The company produces, processes, markets, and distributes shell eggs and reports one operating segment.
Key financial results
| Metric | 13 weeks ended Dec. 2, 2017 | 13 weeks ended Nov. 26, 2016 | 26 weeks ended Dec. 2, 2017 | 26 weeks ended Nov. 26, 2016 |
|---|---|---|---|---|
| Net sales | $361.2m | $253.5m | $624.0m | $493.4m |
| Gross profit (loss) | $82.4m | $3.9m | $99.7m | $(5.6)m |
| Gross margin | 22.8% | 1.6% | 16.0% | (1.1)% |
| Operating loss | $(40.5)m | $(38.3)m | $(64.8)m | $(88.6)m |
| Net loss attributable to Cal-Maine | $(26.1)m | $(23.0)m | $(42.1)m | $(53.9)m |
| Basic and diluted loss per share | $(0.54) | $(0.48) | $(0.87) | $(1.12) |
Quarterly sales rose 42.4%, chiefly from higher shell-egg prices and, to a lesser extent, higher volume. Dozens sold increased 4.3% to 263.1 million; average shell-egg selling price rose 36.0% to $1.321 per dozen. For the first half, sales rose 26.5%, dozens sold increased 3.6% to 512.5 million, and average price rose 21.9% to $1.173 per dozen.
Quarterly cost of sales increased 11.7% to $278.8 million, below the sales increase. Feed cost per dozen was down 1.5% in the quarter and 7.3% in the first half, while higher production and purchased-egg costs offset some of the benefit. SG&A was $42.2 million for the quarter and $83.9 million for the first half.
Cash flow and liquidity: First-half operating cash flow was $64.8 million, versus cash used of $70.2 million a year earlier. Investing cash use was $60.4 million, including $10.2 million of capital expenditures and $2.8 million invested in the Red River joint venture; financing cash use was $2.2 million. Cash was $19.8 million at period end. Current assets were $486.2 million and current liabilities $174.9 million; working capital was $311.2 million and the current ratio 2.78. Current available-for-sale securities were $189.5 million. Total debt and capital lease obligations, including current maturities, were $8.5 million, down from $10.9 million at June 3, 2017.
Material changes and notable items
- Improved egg prices and volume lifted first-half gross profit from a prior-year gross loss. The company said the southeastern large-egg index averaged $1.19 per dozen in the first half, up 53.8% year over year, but below its $1.46 fiscal 2012–2016 average.
- A December 29, 2017 agreement to resolve claims by several large direct-action purchasers calls for a single $80.8 million payment. The company recorded the expense and current liability in the quarter ended December 2; it estimated the after-tax charge at $52.8 million, or $1.09 per share. This charge materially affected reported operating and net results.
- The federal tax reform law was enacted December 22, after quarter-end. Management expected the reduction in the corporate tax rate from 35% to 21% to lower the $75.3 million deferred tax liability and benefit income tax expense in the third quarter; the filing did not quantify the benefit.
- No dividend was payable for the first or second quarters of fiscal 2018 under the company’s policy. At December 2, cumulative losses of $116.8 million had to be recovered before dividends could resume.
Outlook, risks, and contingencies
The filing provides no formal earnings or revenue guidance. Management described retail demand as good, institutional demand as improving, and exports as recovering; it also noted that USDA-reported increases in chicks hatched could signal future supply growth. The company expects adequate corn and soybean meal supplies for the remainder of fiscal 2018 and reported no material egg-production loss from quarter-period hurricanes. It expects to fund its share of Red River joint-venture costs, with approximately $6 million of additional contributions estimated for remaining construction, and believes cash, investments, and operating cash flows can fund projected needs for at least 12 months.
Key exposures include volatile egg prices and supply, feed commodity costs, disease and product-recall risks, seasonal demand, and the ability to meet customer demand for cage-free and other specialty eggs. Management also identified ongoing litigation: the $80.8 million settlement does not resolve all proceedings, including indirect-purchaser claims and an appeal involving egg-product plaintiffs. The company said it would continue to defend remaining matters; their ultimate outcomes could not be predicted. It was in compliance with debt covenants at period-end. The filing also noted the USDA’s proposed withdrawal of rules that could have raised organic-egg production costs; if finalized, existing regulations would remain in effect.
Important facts for investors to verify
- Final execution, payment timing, and scope of the $80.8 million antitrust settlement, and the status and potential exposure of remaining litigation.
- The realized tax-reform benefit in subsequent financial statements and its effect on deferred taxes and the effective tax rate.
- Whether improved egg prices and demand persist, given possible supply growth, and how selling prices compare with feed and purchased-egg costs.
- Red River joint-venture funding needs, operating performance, and expected remaining construction contributions.
- Dividend resumption conditions and progress in recovering the disclosed $116.8 million cumulative loss balance.