Cal-Maine Foods, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first half ended December 1, 2018 (13 and 26 weeks, respectively); comparisons are with periods ended December 2, 2017. Cal-Maine produces, processes, markets, and distributes shell eggs and related products.
Financial performance
| Metric | 13 weeks ended Dec. 1, 2018 | Prior-year quarter | 26 weeks ended Dec. 1, 2018 | Prior-year half |
|---|---|---|---|---|
| Net sales | $356.0 million | $361.2 million | $696.6 million | $624.0 million |
| Gross profit / margin | $70.5 million / 19.8% | $82.4 million / 22.8% | $127.7 million / 18.3% | $99.7 million / 16.0% |
| Operating income (loss) | $25.3 million | $(40.5) million | $38.0 million | $(64.8) million |
| Net income (loss) attributable to Cal-Maine | $21.8 million | $(26.1) million | $34.2 million | $(42.1) million |
| Diluted EPS | $0.45 | $(0.54) | $0.71 | $(0.87) |
- Revenue mix and drivers: Second-quarter sales fell 1.4%, primarily from slightly lower shell-egg prices and volume. Shell-egg volume was down 0.3% to 262.3 million dozen and average selling price declined 0.8% to $1.311 per dozen. First-half sales rose 11.6%, primarily as average shell-egg price increased 11.6% to $1.309; volume was essentially flat at 512.3 million dozen.
- Product trends: First-half specialty shell-egg sales increased to $233.1 million from $215.0 million; specialty dozens sold rose 6.6%. Egg-product sales rose to $23.1 million from $17.0 million in the first half.
- Costs and margins: Second-quarter cost of sales increased 2.4% while sales declined, reducing gross profit by $11.9 million. Feed cost per dozen rose 7.0% to $0.415 in the quarter and 8.4% to $0.414 for the half. First-half cost of sales rose 8.5%, partly reflecting feed, outside egg purchases, and freight.
- Unusual comparison: Legal settlement expense was $2.3 million in each current-year period, versus $80.8 million in the comparable prior-year periods, reflecting antitrust settlements. This substantially affects the year-over-year operating-income comparison.
- Cash flow: First-half operating cash flow was $27.7 million, down from $64.8 million. Investing activities used $6.5 million, including $17.9 million for the Featherland acquisition and $19.0 million for property and equipment, partly offset by net investment-security proceeds. Financing activities used $23.4 million, including $21.2 million of dividends and $2.2 million of debt and lease principal payments. Cash declined $2.2 million to $46.2 million.
- Liquidity and debt: Working capital was $493.0 million and the current ratio was 6.06. Current investment securities were $252.1 million. Total debt and capital lease obligations were $3.9 million, down from $6.1 million at June 2, 2018. The $100 million revolving facility had no borrowings outstanding. The company reported compliance with loan covenants.
Changes, outlook, and risks
- On October 14, 2018, the company acquired substantially all assets of Featherland Egg Farms for $17.9 million cash. The facilities near Marion, Texas include capacity for approximately 600,000 laying hens. Purchase-price allocation remains preliminary.
- Management reported strong 2018 retail demand and improving institutional demand, but noted a larger hen flock and rising hatch numbers. USDA-reported hatch was up 10% year to date while hen inventory was up 2.8%; management said supply concerns appeared to be affecting market prices. No specific earnings or revenue guidance was provided.
- Egg prices are volatile and affected by supply, demand, seasonality, and customer promotions. Feed is a major production cost; management cited volatile grain prices and tariff-related uncertainty, while noting a record corn and soybean harvest was expected to support ample feed supply for fiscal 2019.
- Demand for cage-free and other specialty eggs is driving investment and customer commitments. California Proposition 12 requires cage-free eggs or egg products sold in California by 2022; management expects potential effects on supply and pricing elsewhere. Approved construction projects totaled $57.7 million, with $48.5 million remaining at December 1, 2018.
- Management said cash, investments, operating cash flow, and the revolving facility should cover projected capital needs for at least 12 months. The revolving facility includes working-capital and capital-expenditure covenants and restricts dividends to the company’s stated policy.
- The remaining egg-products antitrust plaintiffs seek treble damages and injunctive relief. A renewed summary-judgment hearing occurred December 19, 2018; no ruling was reported. Management said a material adverse outcome remains reasonably possible, but the potential exposure could not be estimated. Other claims were not expected by management to materially affect results or financial position.
- The company adopted the revenue-recognition standard without impact on results or financial position. Management did not expect the new lease standard to have a material impact, although its assessment was incomplete.
Key facts for investors to verify
- Whether egg supply growth and seasonal pricing pressure affect realized prices and margins after the reporting period.
- Whether feed and outside-egg costs change, and how those costs compare with selling-price trends.
- Developments in the remaining antitrust litigation, including any court ruling, settlement, or estimable exposure.
- Progress, remaining costs, and returns on cage-free and convertible-facility projects, and integration of the Featherland assets.
- Cash generation, dividend payments under the earnings-based policy, and continued compliance with debt-facility covenants.