Cal-Maine Foods, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended June 1, 2019 (52 weeks). The filing also presents unaudited fourth-quarter results for the 13 weeks ended June 1, 2019. Although the request identifies “2018 Q4,” this filing covers FY2019; its fourth quarter is in 2019.
Business context
Cal-Maine is the largest U.S. producer and marketer of shell eggs, operating an integrated production, processing, packaging, and distribution business. It sold 1,038.9 million dozen eggs in FY2019, about 19% of estimated domestic shell-egg consumption. Specialty eggs are a growing focus, including cage-free, organic, brown, and nutritionally enhanced products.
Key financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $1,361.2 million | $1,502.9 million |
| Gross profit / margin | $222.9 million / 16.4% | $361.0 million / 24.0% |
| Operating income | $45.8 million | $100.5 million |
| Net income attributable to Cal-Maine | $54.2 million | $125.9 million |
| Diluted earnings per share | $1.12 | $2.60 |
| Cash provided by operating activities | $115.1 million | $200.4 million |
| Working capital / current ratio | $492.8 million / 7.58 | $479.7 million / 5.45 |
| Total debt, including current maturities | $2.3 million | $6.1 million |
At June 1, 2019, cash and cash equivalents were $69.2 million and current available-for-sale investments were $250.2 million. Total assets were $1,156.3 million and stockholders’ equity was $989.8 million. The $100 million revolving credit facility had no borrowings; $3.7 million of letters of credit were issued under it. The company reported compliance with its loan covenants.
Fourth-quarter FY2019 net sales were $280.6 million versus $443.1 million a year earlier; gross profit was $12.8 million versus $141.2 million, and the company recorded a net loss attributable to Cal-Maine of $19.8 million, or $0.41 per diluted share, versus net income of $71.8 million, or $1.48 per diluted share.
Changes and drivers
- FY2019 sales fell 9.4%, primarily because oversupply pressured non-specialty egg prices. Total dozens sold were nearly flat, up 0.1%.
- Average shell-egg selling price declined to $1.265 per dozen from $1.397. Non-specialty price fell to $1.041 from $1.226; specialty price was comparatively stable at $1.931 versus $1.916.
- Feed cost per dozen produced rose 5.3% to $0.415, contributing to weaker margins. Total cost of sales was nearly unchanged at $1,138.3 million.
- Specialty eggs increased to 36.2% of shell-egg sales dollars from 32.0%, and 23.8% of volume from 23.5%.
- Operating cash flow declined by $85.3 million, mainly reflecting lower gross profit. Capital expenditures were $68.0 million; the company also spent $17.9 million to acquire Featherland Egg Farms.
- FY2019 included $2.3 million of legal settlement expense, compared with $80.8 million in FY2018. FY2018 also included a $43 million tax benefit related primarily to federal tax-rate changes; FY2019’s effective tax rate was 22.5% versus 7.6%.
Outlook, risks, and contingencies
- Management expected FY2020 feed costs to be more volatile and potentially higher, citing weather-related crop risks alongside trade-related uncertainty. The filing provides no specific earnings or revenue guidance.
- Management stated that cash, investments, borrowing capacity, and operating cash flows should be sufficient for current and projected capital needs. Approved construction projects had $153.9 million of projected costs remaining as of July 19, 2019, largely for cage-free or convertible facilities.
- Key business risks include volatile egg prices and feed costs, industry overproduction, seasonality, disease and biosecurity events, food safety and recalls, customer concentration, and costs of cage-free transitions and regulation. Walmart and Sam’s Club together represented 33.7% of FY2019 net sales; the top ten customers represented 69.8%.
- Most egg-antitrust claims had been settled or dismissed, but claims by four egg-products plaintiffs remained. The court denied defendants’ renewed summary-judgment motions in June 2019; plaintiffs sought a transfer for trial. Management said a material adverse outcome remained reasonably possible, but the amount of exposure could not be estimated and no adjustment was recorded.
- The Oklahoma watershed pollution case remained unresolved; management assessed the risk of material loss as remote. The company reported effective disclosure controls and internal control over financial reporting, with unqualified audit opinions.
Important facts for investors to verify
- Whether egg supply and wholesale prices stabilize, and how quickly FY2019’s price and margin declines reverse.
- Actual feed-cost trends versus management’s warning of potentially higher, more volatile FY2020 costs.
- Progress, spending, and expected returns on cage-free capacity projects and customer transition commitments.
- Developments in the remaining antitrust litigation, including any trial schedule, damages claims, or change in the company’s assessment.
- Customer concentration and the company’s ability to maintain major customer relationships.
- Dividend eligibility under the earnings-based policy and lender restrictions; the filing reports $19.8 million of cumulative losses to recover before further dividends under the policy.