Cal-Maine Foods, Inc. — Q1 FY2017 Form 10-Q
Business context and period: The company produces, processes, markets, and distributes shell eggs, with one operating segment. This unaudited report covers the 13 weeks ended August 27, 2016; comparisons are with the 13 weeks ended August 29, 2015. Results are seasonal and highly sensitive to egg prices and feed costs.
Financial performance and liquidity
- Revenue: Net sales were $239.8 million, down 60.7% from $609.9 million. Shell eggs represented approximately 98% of current-quarter sales.
- Profitability: Gross loss was $9.6 million, versus gross profit of $263.1 million; gross margin fell to -4.0% from 43.1%. Operating loss was $49.8 million, versus operating income of $220.1 million. Net loss attributable to Cal-Maine was $30.9 million, or $0.64 per basic and diluted share, versus net income of $143.0 million, or $2.97 basic and $2.95 diluted.
- Cash flow: Operating activities used $45.4 million, compared with $154.1 million provided a year earlier. Investing activities provided $55.7 million, largely reflecting $92.8 million of investment-security sales; capital expenditures were $23.9 million. Financing activities used $1.6 million. Cash increased $8.6 million to $37.6 million.
- Liquidity and debt: At quarter-end, current assets were $574.0 million and current liabilities $75.1 million; working capital was $498.8 million and the current ratio 7.70. Cash plus current available-for-sale securities totaled approximately $306.8 million. Total debt, including current maturities, was $24.0 million, down from $25.6 million at May 28, 2016. The company reported compliance with its debt covenants.
- Margins and costs: Average shell-egg selling price fell 57.6% to $0.952 per dozen, while dozens sold fell 6.4% to 242.3 million. Farm production cost rose 5.1% to $0.725 per dozen produced; feed cost rose 2.9% to $0.431 per dozen.
- Dividends: No dividend was earned or paid for the quarter because of the net loss. The company reported $31.3 million of cumulative losses that must be recovered before dividends can resume under its policy.
Material changes versus prior period
- The steep sales and earnings decline primarily reflected much lower egg prices. The prior-year comparison followed the 2015 avian-influenza outbreak, which reduced flock supply and drove unusually high egg prices.
- Non-specialty egg average selling price declined 70.7% to $0.638 per dozen; specialty egg price declined 20.5% to $1.973. Specialty eggs rose to 46.7% of net sales from 24.7%, although specialty volumes and prices also fell.
- Egg-product sales fell 79.5% to $5.6 million, while pounds sold increased 1.8%; management attributed the revenue decrease primarily to sharply lower selling prices.
- Cost of sales declined 28.1%, mainly because outside egg purchases cost less, but this did not offset the decline in selling prices. SG&A fell 6.3% to $40.3 million.
Outlook, commentary, and risks
- Management said the national laying flock was expected to increase through the end of calendar 2016, potentially adding supply and further pressure to prices. Egg prices were expected to remain volatile; recovery in institutional demand and supply levels were key uncertainties. Retail demand remained favorable, but weaker institutional demand and exports had increased inventories.
- The company planned future farm expansion for cage-free environments or equipment convertible to cage-free, responding to customer transition goals. Approved construction projects totaled $142.0 million, with $37.8 million of projected cost remaining at August 27, 2016.
- The company expected to close its acquisition of substantially all assets of Dixie Egg Company in Q2 FY2017. The assets include facilities with capacity for approximately 1.6 million laying hens, contract-grower arrangements for another 1.5 million hens, and specified Egg-Land’s Best franchise rights. Completion remained subject to transaction conditions.
- Management expected available cash, investments, borrowings, and operating cash flows to fund projected needs for at least 12 months. This outlook should be considered against negative operating cash flow in the quarter and planned capital spending.
- Egg-antitrust litigation remained pending. Courts had dismissed certain claims and narrowed others, and management said the risk of a material adverse outcome had been reduced, but a material adverse outcome remained reasonably possible. The company could not estimate potential monetary exposure, and no related adjustment was reflected in the statements.
- Other principal risks include volatile egg prices and feed costs, disease and weather, product recalls, demand and supply changes, specialty-egg transition execution, acquisition conditions, and litigation. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether egg prices, flock supply, institutional demand, and export demand improved or deteriorated after quarter-end.
- Whether Dixie Egg Company’s acquisition closed as expected, and its purchase terms, financing, and subsequent operating contribution.
- Actual spending, completion timing, and returns on the cage-free and other construction projects, including the remaining Red River joint-venture funding.
- Developments in the antitrust cases, including class-certification motions, remaining claims, trial timing, and any estimable exposure.
- Whether operating cash flow recovers and the company remains within debt covenants while funding planned capital needs; also whether cumulative losses are recovered sufficiently to permit dividends to resume.