Cal-Maine Foods, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended February 27, 2016 (13 weeks), with year-to-date results for the 39 weeks ended February 27, 2016. Comparatives are the corresponding periods ended February 28, 2015. Financial statements are unaudited; amounts below are in U.S. dollars.
Business context
Cal-Maine is an integrated producer, processor, marketer and distributor of shell eggs, with egg products as a smaller business. Shell eggs accounted for about 97% of quarterly and 96% of year-to-date net sales. Results are highly sensitive to volatile egg prices, feed costs and seasonal supply and demand.
Financial performance and liquidity
| Metric | 13 weeks ended Feb. 27, 2016 | 39 weeks ended Feb. 27, 2016 |
|---|---|---|
| Net sales | $449.8 million, up 2.8% | $1,605.6 million, up 36.9% |
| Gross profit / margin | $132.7 million / 29.5% | $607.4 million / 37.8% |
| Operating income / margin | $85.8 million / 19.1% | $472.0 million / 29.4% |
| Net income attributable to Cal-Maine | $64.2 million; $1.33 per basic and diluted share | $316.4 million; $6.57 basic and $6.54 diluted per share |
| Operating cash flow | Not presented quarterly | $332.7 million, versus $136.4 million |
- Quarterly shell-egg sales volume fell 1.9% to 277.6 million dozen, while average selling price rose 4.3% to $1.568 per dozen. Year-to-date volume increased 0.3% to 800.5 million dozen and average price rose 35.6% to $1.919.
- Quarterly cost of sales declined 2.5% to $317.0 million; year-to-date cost of sales rose 12.6% to $998.2 million, substantially less than sales growth. Feed cost per dozen produced fell 5.0% in the quarter and 6.7% year to date.
- Cash and cash equivalents were $8.1 million at February 27, 2016. Current available-for-sale investments were $378.9 million; total current assets were $654.3 million and current liabilities $127.6 million. Working capital was $526.6 million and the current ratio was 5.13.
- Total debt, including current maturities, was $27.2 million, down from $50.9 million at May 30, 2015. The company prepaid $18.1 million of long-term debt during the period and reported compliance with debt covenants.
- Year-to-date investing cash outflow was $207.4 million, including $55.1 million in property and equipment purchases and $29.2 million invested in the Red River Valley Egg Farm joint venture. Financing cash outflow was $125.9 million, including $99.5 million of dividends and $23.6 million of debt principal payments. Cash declined $0.5 million from fiscal year-end.
Material changes and management commentary
- Management attributed the strong year-to-date improvement mainly to higher egg selling prices and lower feed costs. Industry avian influenza in 2015 reduced the national laying-hen flock and sharply raised egg prices; prices subsequently declined after November 2015.
- Quarterly results were more modest: the company cited increased industry egg supplies, weaker demand for egg products, increased imports and reduced exports. Management reported no positive avian-influenza tests at its own facilities as of the filing, while noting that its flocks could still be affected.
- Specialty shell-egg sales volume rose 13.7% in the quarter and 18.0% year to date, increasing specialty eggs’ share of shell-egg sales. Egg-product sales increased 27.8% in the quarter and 79.2% year to date, reflecting higher volume and prices.
- Quarterly SG&A rose 16.0% to $47.0 million, with higher specialty-egg expenses and payroll/overhead, including increased bonus accruals. Other income included a $1.8 million gain on a property sale and higher patronage income; year-to-date royalty income declined from the prior year, which included a one-time lease bonus.
- The company listed approved construction projects totaling $160.9 million, with $62.4 million of projected costs remaining as of February 27, 2016. It expected to contribute an additional $12.2 million to Red River during fiscal 2016. Management believed cash, investments, borrowing capacity and operating cash flows would cover projected needs for at least the next 12 months.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management expected lower feed prices in fiscal fourth quarter versus the prior-year quarter, but cautioned that feed prices remain volatile. Egg prices are also volatile and subject to seasonal patterns and supply-demand changes.
- Key operating risks include avian influenza and other disease, weather, product recalls, changes in egg demand and prices, and commodity feed costs. Management cautioned that interim results are not necessarily indicative of full-year results.
- Egg-antitrust litigation remains ongoing. The direct-purchaser class settlement had received court approval; indirect-purchaser class certification for state-law damages was denied, but a renewed motion for a federal injunctive-relief class remained pending. Several individual direct-action cases also remained pending. Management said a material adverse outcome remained reasonably possible, but the monetary exposure could not be estimated and no related adjustment was recorded.
- The company had $3.7 million of cash-collateralized standby letters of credit. Management reported no material change in previously disclosed market risks or risk factors.
Important facts for investors to verify
- Whether egg prices and industry supply continue to support margins after the post-November 2015 price decline, and whether avian influenza affects the company’s flocks or market supply.
- Progress and remaining funding needs for the $160.9 million construction program and the Red River joint venture.
- Developments in the remaining antitrust cases, including potential exposure that the company says cannot currently be estimated.
- Composition, maturities and credit quality of the substantial available-for-sale investment portfolio, and the company’s liquidity and capital-allocation plans.
- The company’s dividend policy: quarterly dividends are generally based on one-third of quarterly net income attributable to Cal-Maine, subject to the policy’s cumulative-profit condition and debt-agreement restrictions.