Cal-Maine Foods, Inc. — Form 10-Q Summary
Reporting period: The 13 and 26 weeks ended November 28, 2015 (fiscal 2016 second quarter and first half); comparisons are with the periods ended November 29, 2014. Amounts are in U.S. dollars.
Business context and results
Cal-Maine is an integrated producer, processor, marketer, and distributor of shell eggs, with egg products as a smaller business. Results are highly sensitive to volatile egg prices, feed costs, and seasonal supply and demand.
- Second quarter: Net sales were $546.0 million, up 44.2%. Net income attributable to Cal-Maine was $109.2 million, versus $36.6 million; diluted EPS was $2.26, versus $0.76.
- First half: Net sales were $1,155.9 million, up 57.1%. Net income attributable to Cal-Maine was $252.3 million, versus $64.3 million; diluted EPS was $5.22, versus $1.33.
- Margins: Second-quarter gross margin was 38.8%, versus 24.5%, and operating margin was 30.5%, versus 14.7%. First-half gross margin was 41.1%, versus 23.6%, and operating margin was 33.5%, versus 13.2%.
- Drivers: Second-quarter shell-egg selling price per dozen rose 42.9% to $1.970, while dozen sales increased 0.3%. First-half average selling price rose 54.0% to $2.105, and dozens sold increased 1.5%. Egg-product sales rose 91.6% in the quarter and 99.2% for the first half, supported by higher prices and volume.
- For the first half, cost of sales increased 21.3% to $681.2 million, slower than sales growth. Feed cost per dozen produced fell 7.4% to $0.423; outside egg purchase costs increased substantially.
Cash flow, liquidity, and capital
- First-half operating cash flow was $300.5 million, versus $68.1 million a year earlier. Investing activities used $208.4 million, including $34.0 million of property and equipment purchases and $19.7 million invested in the Red River joint venture. Financing activities used $85.7 million, including $63.1 million of dividends and $22.1 million of debt principal payments.
- At November 28, 2015, cash was $15.0 million and current investment securities were $405.3 million. Working capital was $494.9 million and the current ratio was 3.02. The current ratio was lower than 3.86 at May 30, 2015, while working capital increased from $377.0 million.
- Total debt, including current maturities, was $28.8 million, down from $50.9 million at May 30, 2015. The company prepaid $18.1 million of debt during the half and reported compliance with its loan covenants.
- Capital projects approved as of December 23 totaled $167.3 million, with $61.7 million of projected cost remaining. The company expected to contribute another $21.7 million to its 50% share of Red River construction costs. Management said cash, investments, borrowing capacity, and operating cash flow should fund projected capital needs.
- Under its dividend policy, the company generally accrues dividends equal to one-third of quarterly net income attributable to Cal-Maine. The reported second-quarter dividend was $0.751 per share.
Material changes, outlook, and risks
- The filing attributes unusually strong results primarily to the 2015 avian influenza outbreak, which reduced industry supply and drove egg prices higher. Management cited industry estimates that about 12% of the U.S. laying flock was affected and USDA data showing the national flock was about 9% lower year over year as of December 1.
- Management said shell-egg prices had declined after November 28, following a drop in October and a temporary holiday-related recovery. Prices remained above normal at the start of the quarter but were down 12.2% from the first quarter. The filing gives no specific earnings or price guidance.
- No avian influenza had been detected at company locations as of the filing; the company was increasing biosecurity but could not assure its flocks would remain unaffected. Feed prices were also expected to remain volatile despite anticipated adequate supplies from the 2015 crops.
- Other risks include seasonal demand and production changes, disease, weather, feed-cost volatility, acquisitions, and product recalls. Management cautioned that interim results are not necessarily indicative of full-year results.
- In egg antitrust litigation, the direct-purchaser class settlement had been approved and the company dismissed from that case. A court denied certification of indirect-purchaser state damages classes, but a renewed request for a federal injunctive-relief class and other claims remained pending. Management said a material adverse outcome remained reasonably possible, but the potential loss could not be estimated and no amount was accrued.
- Other notable items: prior-year royalty income included a one-time mineral-lease bonus; first-half prior-year other income included an $886,000 property-damage claim gain. Neither was recurring. Disclosure controls were reported effective as of November 28, 2015.
Key facts for investors to verify
- Subsequent egg-price trends and whether elevated prices driven by the avian-influenza supply disruption persist or normalize.
- Future flock health, biosecurity effectiveness, and any new industry disease outbreaks.
- Feed-cost trends and the effect of outside egg purchases, operating costs, and specialty-egg growth on margins.
- Completion, remaining costs, and expected returns of the listed capital projects and Red River joint venture.
- Developments in the remaining antitrust matters, including potential exposure that the filing says cannot currently be estimated.
- Liquidity and dividend capacity as working-capital needs vary seasonally and the company funds capital spending.