Cal-Maine Foods, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, the 13 weeks ended September 1, 2012. Comparisons are with the 13 weeks ended August 27, 2011, except balance-sheet comparisons, which are with June 2, 2012. Amounts are in millions unless noted.
Financial performance
| Metric | Quarter ended Sep. 1, 2012 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $272.9 | $243.8 | +11.9% |
| Gross profit | $44.7 | $33.8 | +32.4% |
| Operating income | $15.6 | $6.0 | +161.8% |
| Net income attributable to Cal-Maine | $9.4 | $3.1 | +202.0% |
| Diluted EPS | $0.39 | $0.13 | +$0.26 |
| Operating cash flow | $(17.8) | $6.3 | $(24.1) |
Statement-based gross, operating, and net margins were approximately 16.4%, 5.7%, and 3.4%, respectively; prior-year gross and operating margins were 13.9% and 2.4%. Sales volume rose 1.0% to 210.1 million dozen, while average selling price increased 10.8% to $1.238 per dozen. Shell eggs accounted for approximately 96% of sales.
Cost of sales increased 8.6% to $228.2 million, less than sales growth. Feed cost per dozen produced rose about 5.4% to $0.51; the filing says feed accounts for approximately 68% of farm production cost. Outside egg purchases also became more expensive. SG&A increased 4.6% to $29.1 million, but declined to 10.7% of sales from 11.4%.
Liquidity, debt, and cash flow
At September 1, cash was $30.6 million and current available-for-sale investments were $178.7 million. Working capital was $295.6 million and the current ratio was 3.41. Total debt, including current maturities, was $73.5 million, down from $76.2 million at June 2. The company reported compliance with its debt covenants.
Cash fell $66.5 million during the quarter to $30.6 million. Operating activities used $17.8 million; investing activities used $33.5 million, including $16.3 million for the Pilgrim’s Pride acquisition and $7.4 million for capital expenditures; financing activities used $15.2 million, including $12.4 million of dividends and $2.7 million of debt principal payments. Management expects cash, investments, borrowing capacity, and operating cash flows to cover current and projected capital needs.
Material changes, outlook, and risks
- Acquisition: On August 10, the company acquired substantially all of Pilgrim’s Pride’s commercial egg assets in Pittsburg, Texas, including two production complexes with capacity for about 1.4 million laying hens and an interest that gave Cal-Maine majority ownership of Texas Egg Products. The preliminary purchase allocation was $18.8 million, including a $2.5 million maximum earn-out recorded as a liability; the cash-flow statement reports $16.3 million of net acquisition cash use.
- Operating outlook: Management said drought-reduced crop yields, ethanol demand, and competition for acreage were driving high corn and soybean-meal prices, with feed costs expected to remain high and volatile in the year ahead. The filing provides no quantified earnings or revenue guidance.
- Seasonality and market exposure: Egg prices are volatile and outside the company’s control; results are seasonal, and supply-demand shifts can materially affect prices. Disease, weather, recalls, feed costs, and acquisition-related risks are also identified.
- Capital projects: A $15.3 million cage-free complex in Bremen, Kentucky, was expected to be completed by August 2013; a $7.3 million south Texas cage-free expansion was expected to be completed in fiscal 2013.
- Contingencies: The company described egg antitrust litigation as having a reasonably possible material adverse outcome, but said monetary exposure could not be estimated; no related adjustment was recorded. Other listed legal matters were considered remote for material adverse outcomes, except as otherwise disclosed. Cal-Maine also guarantees 50% of Delta Egg Farm debt of about $8.9 million; management considered payment unlikely.
- Dividend: The policy generally provides a quarterly dividend equal to one-third of quarterly GAAP net income, subject to cumulative profitability and debt-agreement restrictions. The quarter’s declared dividend was $0.131 per common share.
Important facts for investors to verify
- Reconcile MD&A figures with the financial statements: MD&A cites operating income of $14.9 million and a 5.4% operating margin, while the statements report $15.6 million and imply 5.7%. MD&A also cites cost of sales of $228.9 million and gross margin of 16.1%, versus statement figures of $228.2 million and approximately 16.4%.
- Track feed costs, egg prices, and sales volumes, given their material influence on margins and the company’s stated outlook for elevated, volatile feed costs.
- Monitor cash generation and liquidity after the acquisition, dividends, and planned capital projects; operating cash flow was negative despite higher reported earnings.
- Follow the acquisition earn-out valuation and settlement, integration of the acquired assets, and performance of Texas Egg Products.
- Monitor developments in egg antitrust litigation, including potential damages and the status of class and non-class cases; the company says exposure cannot currently be estimated.