Cal-Maine Foods, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended June 2, 2018 (52 weeks), compared with fiscal 2017 ended June 3, 2017 (53 weeks). Although the request identifies “2017 Q4,” this filing reports fiscal 2018 annual results; its fourth quarter ended June 2, 2018.
Business context and financial performance
Cal-Maine is the largest U.S. producer and marketer of shell eggs, with one operating segment. It sold 1,037.7 million dozen eggs in fiscal 2018, about 20% of U.S. shell egg consumption. Results are highly sensitive to wholesale egg prices and feed costs.
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $1,502.9 million | $1,074.5 million |
| Gross profit / margin | $361.0 million / 24.0% | $45.6 million / 4.2% |
| Operating income (loss) / margin | $102.7 million / 6.8% | $(132.1) million / (12.3)% |
| Net income (loss) attributable to Cal-Maine | $125.9 million | $(74.3) million |
| Diluted earnings (loss) per share | $2.60 | $(1.54) |
| Operating cash flow | $200.4 million | $(45.9) million |
| Working capital at year-end | $479.7 million | $371.5 million |
| Total debt, including current maturities | $6.1 million | $10.9 million |
Cash and cash equivalents were $48.4 million, and current available-for-sale investments were $282.6 million at year-end. The current ratio was 5.45, down from 6.74. The company reported total assets of $1,150.4 million and stockholders’ equity of $955.7 million.
Material changes and unusual items
- Sales rose 39.9%, driven mainly by higher non-specialty egg prices: average selling price for all shell eggs increased to $1.397 per dozen from $1.007; volume increased 0.6%.
- Fiscal 2018 average feed cost was $0.394 per dozen produced, down 1.3% from $0.399. Total cost of sales rose 11.0%, much less than sales.
- Results included an $80.8 million antitrust legal settlement expense ($54.8 million after tax, or $1.13 per diluted share) and a $43.0 million income tax benefit from revaluing deferred tax liabilities following U.S. tax reform. These items materially affect comparisons of reported earnings.
- Net egg product sales increased to $43.5 million from $24.9 million, primarily as selling prices recovered. Specialty eggs represented 32.0% of shell egg sales dollars, down from 43.6%, while their share of dozens sold rose to 23.5% from 22.9%.
- Fiscal 2018 included a $17.1 million fourth-quarter dividend payable, equivalent to $0.351 per share under the company’s dividend policy. No dividends were paid in fiscal 2017.
For the fourth quarter ended June 2, 2018, net sales were $443.1 million, gross profit $141.2 million, and net income attributable to Cal-Maine $71.8 million ($1.48 per share). The comparable fiscal 2017 quarter had 14 weeks versus 13 weeks in fiscal 2018.
Outlook, risks and contingencies
- Management said cash, investments, borrowing capacity and operating cash flows should be sufficient for current and projected capital needs. On July 10, 2018, the company entered a $100 million, five-year secured revolving facility; no amount was drawn as of July 20, 2018.
- Management noted rising chick hatch rates and a potential increase in the U.S. laying flock could put further pressure on egg prices. Favorable crop conditions could support lower feed prices, but actual costs remain exposed to weather, commodity markets and tariff-related uncertainty.
- The company plans to expand cage-free or cage-convertible capacity. Approved construction projects had $40.2 million of projected costs remaining at June 2, 2018; management also anticipated about $2 million of additional Red River joint-venture contributions.
- Egg antitrust litigation remains a material uncertainty. Most claims were settled or dismissed, but claims by several egg-products plaintiffs remained; management said a material adverse outcome was reasonably possible and monetary exposure could not be estimated. The separate Oklahoma watershed case remained unresolved, though management assessed material loss as remote.
- Key operating risks include volatile egg prices, feed costs, disease and avian influenza, product contamination and recalls (the company does not carry recall-loss insurance), customer concentration, regulatory and animal-welfare requirements, and seasonality. Wal-Mart and Sam’s Club together generated 33.2% of FY2018 net sales; the top ten customers generated 69.4%.
- Class A shares carry ten votes each, and the Adams and Baker families maintained controlling voting power. The filing also describes planned family share transfers and potential sales of approximately 6 million common shares after Fred Adams’s death, which could affect governance and the stock price.
No numerical earnings or sales guidance is provided. The filing cautions that forward-looking estimates may differ materially from actual results.
Important facts for investors to verify
- Whether egg prices and supply conditions sustain the FY2018 recovery, and how commodity costs and tariffs affect feed expense.
- The status and potential financial exposure of the remaining egg-products antitrust claims and the Oklahoma watershed litigation.
- Execution, costs and returns on cage-free capacity projects and the Red River joint venture.
- Customer concentration, particularly the continued contribution of Wal-Mart and Sam’s Club.
- Use and covenant headroom of the new revolving facility, and the timing and market impact of potential family share sales or control changes.
- The extent to which reported FY2018 earnings depend on the one-time tax benefit and the antitrust settlement charge.