Cal-Maine Foods, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended June 3, 2017 (53 weeks), compared with the 52-week year ended May 28, 2016. Fiscal Q4 comprised 14 weeks, versus 13 weeks in the prior-year quarter. The filing was signed July 21, 2017.
Business context
Cal-Maine is the largest U.S. producer and marketer of shell eggs, with one operating segment. It sold 1,031.1 million dozen eggs in FY2017, approximately 20% of U.S. shell-egg consumption. Operations are vertically integrated, and sales are concentrated in retail and foodservice channels. The business is highly sensitive to wholesale egg prices and feed costs.
Key financial results
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $1,074.5 million | $1,908.7 million |
| Gross profit / margin | $45.6 million / 4.2% | $648.1 million / 34.0% |
| Operating income (loss) | $(132.1) million | $471.9 million |
| Net income (loss) attributable to Cal-Maine | $(74.3) million | $316.0 million |
| Basic and diluted EPS | $(1.54) | $6.56 / $6.53 |
| Cash from (used in) operations | $(49.3) million | $381.8 million |
- Shell-egg volume fell 2.1% to 1,031.1 million dozen. Average shell-egg selling price fell 42.0%, to $1.007 per dozen from $1.735.
- Feed cost declined 3.6% to $0.399 per dozen produced. Farm production cost remained $0.693 per dozen.
- Egg-product sales dropped 64.7% to $24.9 million despite an 11.6% increase in pounds sold; realized price per pound fell 68.5%.
- Specialty eggs rose to 43.6% of shell-egg sales dollars from 29.1%, while their share of dozen volume was unchanged at 22.9%. Specialty average selling price declined to $1.939 per dozen from $2.213.
- Fiscal Q4 sales were $274.6 million, gross profit $12.0 million, and net loss attributable to Cal-Maine $24.5 million, or $0.51 per share. The comparable 13-week quarter recorded sales of $303.0 million, gross profit of $40.7 million, and a $0.4 million net loss.
Liquidity, debt and capital
- At June 3, 2017, working capital was $371.5 million (prior year $542.8 million) and the current ratio was 6.74 (7.50).
- Cash and cash equivalents were $17.6 million; current available-for-sale securities were $138.5 million, down from $360.5 million. Management said cash, investments, borrowing capacity and expected operating cash flows should fund projected needs.
- Total debt, including current maturities and capital leases, was $10.9 million, down from $25.6 million. The company reported compliance with debt covenants.
- Capital spending was $66.7 million. The company paid $85.8 million for the Foodonics and Happy Hen acquisitions and invested $19.9 million in the Red River joint venture. A further approximately $8 million of Red River contributions was anticipated for remaining construction costs.
- No FY2017 dividends were paid. Under company policy, dividends resume only after cumulative profitability is restored; cumulative losses to recover were $74.7 million at year-end.
Changes, outlook and notable items
- Price and supply reversal: The 2015 avian-influenza outbreak had constrained supply and supported FY2016 prices. Flock repopulation above pre-outbreak levels, together with weaker egg-product demand, created oversupply and severe price pressure in FY2017. Cal-Maine reported no positive avian-influenza tests at its locations.
- Management outlook: Management expected egg markets to remain under pressure and did not expect meaningful price improvement until supply and demand were better balanced. It noted that chick-hatch trends suggested possible moderation in flock size. Feed prices had increased after year-end; management expected continued volatility but adequate ingredient supply for FY2018.
- Growth and cage-free transition: Foodonics was acquired for $68.6 million cash plus $3.0 million deferred consideration; Happy Hen was acquired for $17.2 million. The company is investing in cage-free or convertible facilities as major customers set future cage-free sourcing targets. The transition may increase capital and operating costs, and cost pass-through is not assured.
- Unusual items: Other income included a $5.5 million net recovery from the Deepwater Horizon settlement program. Cal-Maine recorded a $3.7 million loss on retirement of layer houses. A fiscal-year loss carryback generated a tax benefit, but the Q4 carryback adjustment reduced the tax benefit by $4.1 million.
- Legal contingencies: Egg-antitrust claims remained pending. Some class-certification and summary-judgment rulings favored defendants, but management said a material adverse outcome remained reasonably possible; monetary exposure could not be estimated and no adjustment was recorded. Management assessed material loss in the Oklahoma watershed matter as remote.
- Other risks: Egg prices and corn/soybean meal costs are volatile; disease, contamination and recalls could disrupt operations (the company does not insure recall losses). The top ten customers generated 69.5% of sales, and Walmart and Sam’s Club together accounted for 28.9%. The Adams and Baker families controlled 66.2% of voting power as of July 1, 2017.
Investor verification points
- Track wholesale egg prices, national flock supply, egg-product demand and feed costs—the principal drivers of margins and cash generation.
- Check whether cage-free capacity, customer commitments, pricing and transition costs develop as planned.
- Review acquisition integration, Red River project spending and returns, and the company’s liquidity as operating cash flow recovers or weakens.
- Monitor antitrust litigation, appeals and any change in management’s ability to estimate exposure.
- Confirm dividend eligibility against the cumulative-loss recovery policy and loan restrictions.
- Note that the independent auditor issued an unqualified opinion on the financial statements and internal controls; management and the auditor reported effective internal control as of June 3, 2017.