Cal-Maine Foods, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first 39 weeks of fiscal 2018, ended March 3, 2018; comparisons are with the 13 and 39 weeks ended February 25, 2017. The company produces, processes, markets, and distributes shell eggs, including specialty eggs.
Financial performance
Amounts are in millions of dollars except per-share and per-dozen data.
| Metric | 13 weeks ended Mar. 3, 2018 | 13 weeks prior year | 39 weeks ended Mar. 3, 2018 | 39 weeks prior year |
|---|---|---|---|---|
| Net sales | $435.8 | $306.5 | $1,059.8 | $799.9 |
| Gross profit / margin | $120.1 / 27.6% | $39.2 / 12.8% | $219.8 / 20.7% | $33.5 / 4.2% |
| Operating income (loss) / margin | $76.2 / 17.6% | $(5.2) / (1.7)% | $11.4 / 1.0% | $(93.8) / (11.7)% |
| Net income (loss) attributable to Cal-Maine | $96.3 | $4.1 | $54.2 | $(49.8) |
| Diluted EPS | $1.99 | $0.09 | $1.12 | $(1.03) |
| Operating cash flow | Not presented separately | Not presented separately | $146.1 | $(57.2) |
- Third-quarter sales rose 42.2%, mainly on higher shell-egg prices and, to a lesser extent, volume. Dozens sold increased 3.6% to 273.2 million; the average shell-egg selling price rose 36.7% to $1.545 per dozen.
- For the 39-week period, sales rose 32.5%; dozens sold increased 3.6% to 785.8 million and average shell-egg price increased 27.7% to $1.303 per dozen.
- Third-quarter cost of sales increased 18.1% to $315.7 million, less than sales growth. Feed cost was $0.396 per dozen, unchanged year over year for the quarter. For 39 weeks, feed cost declined 4.7% to $0.387 per dozen; higher purchased-egg and freight costs partly offset the benefit.
- Cash and cash equivalents were $106.2 million and current available-for-sale securities were $177.3 million at March 3. Working capital was $391.8 million; the current ratio was 3.17, versus 6.74 at June 3, 2017. The lower ratio reflected the accrued settlement and higher payables.
- Total debt and capital lease obligations were $7.3 million, down from $10.9 million at June 3, 2017. The company reported compliance with its debt covenants.
- For the 39 weeks, investing activities used $53.0 million and financing activities used $4.5 million. Capital expenditures were $13.6 million, compared with $54.9 million in the prior-year period.
Material changes and unusual items
- Egg-market conditions improved substantially: the 39-week average Urner-Barry Southeastern Large Egg Index was $1.37 per dozen, up 59.5% from $0.86. Management cited strong retail demand, increased institutional usage, and recovering export demand; it also noted that increased chick hatches could signal future supply growth.
- Third-quarter net income included a provisional $35 million discrete tax benefit from the Tax Cuts and Jobs Act. The company had not completed its tax accounting and expected to finish its analysis in the fourth quarter; adjustments to provisional amounts could follow. Management estimated future tax rates at 21% federal plus approximately 3% state tax-effected rate.
- An $80.8 million antitrust settlement expense was recorded in the second quarter and is included in the 39-week results, but not the third-quarter results. The company paid the settlement on March 23, 2018, after quarter-end; it expected the tax deduction in the fourth quarter. The disclosed after-tax impact was $54.8 million, or $1.13 per share.
- No dividend was payable for the first three quarters of fiscal 2018 under the company’s cumulative-profit dividend policy. At March 3, cumulative losses of $20.5 million had to be recovered before dividends could resume.
Outlook, risks, and contingencies
- Management said cash, investments, and operating cash flows should be sufficient for current and projected capital needs for at least 12 months. No specific earnings or revenue guidance was provided.
- The company expected approximately $2 million of additional contributions to its Red River joint venture for remaining construction costs, primarily a feed mill; the farm was in full production. No material construction projects were underway at quarter-end, though cage-free expansion may continue to meet customer demand.
- Egg prices are volatile and sensitive to supply, demand, and seasonality. Feed inputs, particularly corn and soybean meal, are commodity risks; feed represented 57% of farm egg production cost in the quarter. Disease, weather, product recalls, cage-free transition requirements, and customer demand are also identified risks.
- Several direct-action antitrust claims were settled, but egg-product plaintiffs remain. A court remanded their case for further proceedings; the company’s summary-judgment motion was pending, and management said a material adverse outcome remained reasonably possible. The filing stated that monetary exposure could not be estimated.
- The USDA withdrew proposed organic-egg rules that could have increased production costs. Management reported no other material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether egg prices and demand remain strong as higher chick hatch rates potentially increase supply, and how that affects realized prices and margins.
- The final accounting for the Tax Cuts and Jobs Act, including any fourth-quarter changes to the provisional $35 million tax benefit.
- The cash and liquidity effects following the $80.8 million settlement payment, and whether the anticipated settlement tax deduction is realized as expected.
- Developments in remaining egg-product antitrust litigation, for which the company could not estimate potential monetary exposure.
- Progress and remaining funding needs for the Red River joint venture and cage-free capacity plans.