Cal-Maine Foods, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended June 2, 2012 (53 weeks), compared with the 52-week fiscal year ended May 28, 2011. The fourth quarter was 14 weeks, versus 13 weeks in the prior-year quarter. Cal-Maine is a vertically integrated U.S. shell-egg producer and marketer; it reported one operating segment. Unless otherwise noted, amounts below are U.S. dollars.
Financial performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $1,113.1 million | $942.0 million |
| Gross profit / margin | $201.8 million / 18.1% | $184.9 million / 19.6% |
| Operating income / margin | $88.7 million / 8.0% | $83.5 million / 8.8% |
| Net income attributable to Cal-Maine | $89.7 million | $60.8 million |
| Diluted EPS | $3.75 | $2.54 |
| Cash from operating activities | $98.1 million | $62.3 million |
| Capital expenditures | $26.8 million | $20.7 million |
| Cash and cash equivalents | $97.1 million | $57.7 million |
| Current investments available-for-sale | $163.6 million | $118.8 million |
| Total debt, including current maturities | $76.2 million | $88.2 million |
| Working capital / current ratio | $301.5 million / 3.14 | $247.6 million / 3.30 |
- Sales increased 18.2%, reflecting 7.7% more shell-egg dozens sold (884.3 million) and a 9.7% increase in average shell-egg selling price ($1.205 per dozen versus $1.098).
- Cost of sales rose 20.4%; feed cost per dozen increased 19.0%, to $0.469. Gross margin contracted by 1.5 percentage points despite higher selling prices. Operating income increased 6.2%, while operating margin declined 0.8 percentage points.
- Net income increased 47.5%, but the comparison includes a significant unusual item: a $38.3 million distribution recorded as income from Eggland’s Best (EB). Cal-Maine also reported $44.9 million in total patronage refunds and dividends from EB. The filing attributes the special distribution to EB’s joint venture transaction with Land O’Lakes.
- Operating cash flow rose to $98.1 million. Cash increased $39.4 million during the year. The company held $163.6 million in current investment securities; this is separate from cash and cash equivalents.
- Annual dividends were $1.25 per share, versus $0.85 in FY2011. The company’s dividend policy generally links quarterly dividends to one-third of quarterly GAAP income, subject to loan-agreement restrictions.
Fourth-quarter results
For the 14 weeks ended June 2, 2012, net sales were $275.2 million, gross profit was $41.4 million, and net income attributable to Cal-Maine was $37.3 million ($1.57 basic EPS; $1.56 diluted EPS). The comparable 13-week quarter in FY2011 reported sales of $242.4 million and net income of $7.3 million ($0.30 per share). The different quarter lengths and the FY2012 EB distribution affect comparability.
Business, outlook and material developments
- Cal-Maine sold about 19% of U.S. shell-egg consumption. Specialty eggs represented 24.0% of shell-egg sales dollars and 16.3% of dozens sold, broadly stable as a share of sales dollars and slightly higher by volume than FY2011.
- Management expected feed costs to remain high and volatile in the year ahead. Drought had reduced expected corn and soybean yields and driven commodity prices to record levels. Feed represented about 67% of FY2012 farm egg production cost. Egg prices and feed costs are market-driven and can change materially.
- Management said cash balances, investments, borrowing capacity and operating cash flows should be sufficient for current and projected capital needs. This is not earnings guidance; the filing gives no numerical revenue or profit forecast.
- In July 2012, the company announced an agreement to acquire Pilgrim’s Pride’s commercial egg operations, including two complexes with capacity for approximately 1.4 million layers and a 13.6% interest in Texas Egg Products, LLC. Closing was expected in August 2012; the acquisition was pending at the filing date.
- Planned projects included a roughly $15.3 million cage-free complex in Bremen, Kentucky, expected to be completed by August 2013, and a roughly $7.3 million south Texas cage-free expansion expected in FY2013.
- Risks include volatile egg prices and feed costs, seasonality, disease and weather, product contamination and recalls, customer concentration, acquisition integration, environmental and animal-welfare requirements, and litigation. The top ten customers generated 66.3% of sales; Wal-Mart and Sam’s Club together generated 31.3%.
Contingencies and unusual items
- Egg-industry antitrust cases alleged that producers conspired to restrict supply and raise prices. The company denied wrongdoing and intended to defend the cases. Management considered a material adverse outcome reasonably possible, but said the amount of any potential exposure could not be estimated; no related adjustment was recorded in the financial statements.
- The company disclosed other legal matters, including Oklahoma watershed litigation and two Arkansas personal-injury cases. It said it did not expect most other matters to have a material adverse outcome. An EPA notice concerning potential Clean Water Act/request noncompliance related to one Mississippi facility; the company responded and reported no subsequent EPA correspondence or known formal enforcement action.
- FY2012 results included insurance recoveries related to the Shady Dale, Georgia fire: $1.6 million reduced cost of sales and approximately $1.0 million was recorded in other income. The company also reported $736,000 of property and equipment impairment charges.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. Management and the auditor concluded internal controls were effective as of June 2, 2012.
Important facts for investors to verify
- How much of FY2012 net income and EPS came from the EB distribution and related affiliate income, and what earnings look like excluding those items.
- Whether egg selling prices can keep pace with elevated feed costs, and the effect of commodity prices and flock supply on future margins.
- The final terms, purchase accounting, financing and integration impact of the pending Pilgrim’s Pride acquisition.
- The status and potential financial exposure of the antitrust litigation, which management said was not estimable.
- Customer concentration, covenant and dividend restrictions, and the funding and execution of planned cage-free construction.