Cal-Maine Foods, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2021, the 13 weeks ended August 29, 2020. Comparative period: 13 weeks ended August 31, 2019. Financial amounts below are in U.S. dollars.
Business context
Cal-Maine is a vertically integrated producer, processor, marketer and distributor of shell eggs, operating as one segment. Its results are particularly sensitive to volatile egg selling prices and corn and soybean meal costs. The company reported a flock of approximately 40.8 million layers and 9.1 million pullets and breeders.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $292.8 million | $241.2 million |
| Gross profit (loss) | $16.8 million | $(21.1) million |
| Gross margin | 5.7% | (8.8)% |
| Operating loss | $(27.2) million | $(63.5) million |
| Net loss attributable to Cal-Maine | $(19.4) million | $(45.8) million |
| Basic and diluted loss per share | $(0.40) | $(0.94) |
| Net cash used in operating activities | $(14.8) million | $(60.7) million |
Net sales rose 21.4%, principally reflecting a 17.8% increase in average shell-egg selling price and a 3.8% increase in shell-egg volume. Average selling price per dozen was $1.078 versus $0.915. Cost of sales increased 5.2% to $276.0 million. Farm production cost per dozen fell 4.3% to $0.716, including lower feed cost per dozen of $0.388 versus $0.411.
Liquidity, debt and capital
At August 29, 2020, cash and cash equivalents were $42.8 million and current available-for-sale investment securities were $150.5 million. Working capital was $395.3 million and the current ratio was 6.08. The company had no long-term debt outstanding and no borrowings under its $100 million revolving credit facility; $4.3 million of letters of credit were outstanding under the facility. Cash declined $35.3 million during the quarter.
Capital expenditures were $25.3 million. Approved construction projects had $30.5 million of projected costs remaining, with stated completion dates in fiscal 2021 and 2022. Management said cash, investments, operating cash flows and the revolver should be sufficient for projected needs for at least 12 months.
Material changes and management commentary
- Results improved substantially from the prior-year quarter, when an oversupply of eggs and low conventional egg prices contributed to a gross loss. The average price of conventional eggs rose to $0.796 per dozen from $0.624; specialty egg pricing was $1.880 versus $1.869.
- Specialty egg volume increased 15.5%; specialty eggs represented 26.0% of shell-egg volume, compared with 23.4%. The Mahard acquisition contributed to volume growth.
- Foodservice demand remained depressed amid COVID-19, while retail demand remained above the prior-year level. The company incurred $832,000 of additional pandemic-related costs, mainly labor.
- The company reported a $6.1 million income tax benefit and a 24.0% effective tax rate. It adopted the expected-credit-loss standard, recording a $422,000 cumulative increase to retained earnings at the start of the fiscal year.
- No dividend was payable for the quarter under the company’s earnings-based policy; cumulative losses of $20.8 million had to be recovered before a dividend could be paid.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management cited favorable current corn and soybean supply conditions but cautioned that COVID-19 disruptions, weather, trade and geopolitical issues could increase feed-price volatility. Egg prices and demand are seasonal, and management noted continuing uncertainty in foodservice demand and the pandemic’s effects.
Risks include volatile egg prices and feed costs, disease and other production hazards, the ability to meet demand for specialty eggs, and pending litigation. In the Kraft processed-egg antitrust case, management said a material adverse outcome remained reasonably possible, but the potential monetary exposure could not be estimated; the financial statements include no adjustment for it. Management considered the risk of material loss remote in the Texas state pricing case, which was dismissed with prejudice but appealed, and in the Bell consumer case. The company was voluntarily dismissed without prejudice from the Fraser case. The Oklahoma watershed case remains unresolved, though management considers material loss remote.
A related-party secondary offering in August involved the sale of 6.9 million existing shares by the founder’s widow and a family trust; Cal-Maine received no proceeds. The company reported approximately $535,000 of offering-related expense in the quarter, with reimbursement obligations under the agreement. The filing also highlights continued family voting control and the possibility that sales of remaining registered shares could affect the stock price.
Important facts for investors to verify
- Whether egg selling prices and retail and foodservice demand remain sufficient to sustain improved margins.
- Feed-cost trends, production costs, and the timing and cost of approved cage-free and other construction projects.
- Operating cash flow and liquidity, including the use of investment securities and the revolving credit facility.
- Developments in the Kraft antitrust litigation and the company’s inability to estimate potential exposure.
- Potential sales of remaining registered family-held shares and the effect of family voting control.
- Progress toward recovering the cumulative losses required before dividends resume.