Cal-Maine Foods, Inc. — Q1 FY2018 Form 10-Q
Reporting period: Thirteen weeks ended September 2, 2017; comparative period ended August 27, 2016. The company produces, processes, markets, and distributes shell eggs and reports one operating segment.
Financial results
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $262.8 million | $239.8 million |
| Gross profit (loss) | $17.3 million | $(9.6) million |
| Gross margin | 6.6% | (4.0)% |
| Operating loss | $(24.4) million | $(50.4) million |
| Net loss attributable to Cal-Maine | $(16.0) million | $(30.9) million |
| Basic and diluted loss per share | $(0.33) | $(0.64) |
| Cash used in operating activities | $(21.5) million | $(45.4) million |
Revenue increased 9.6%, driven by a 6.8% rise in average shell-egg selling price per dozen to $1.017 and a 2.9% increase in dozens sold to 249.5 million. Shell eggs accounted for approximately 98% of sales. Gross margin improved as selling prices rose and feed costs fell; feed cost per dozen produced declined 13% to $0.375. SG&A was $41.7 million, up 3.5%, including $3.4 million of expenses associated with fiscal 2017 acquisitions.
At September 2, cash and cash equivalents were $18.9 million and current available-for-sale investments were $107.0 million. Working capital was $357.5 million, with a 6.67 current ratio. Total debt, including current maturities and long-term leases, was approximately $9.7 million, down from $10.9 million at June 3, 2017. Total assets were $1.01 billion and total liabilities were $181.6 million. The company reported $56.0 million of income tax receivable.
Changes and operating context
- Net sales rose $23.0 million year over year; the company attributed approximately $15.7 million of the increase to higher average selling prices and $6.8 million to higher volume.
- Non-specialty egg dozens sold increased 5.2% and average price rose 22.4% to $0.760 per dozen. Specialty egg volume fell 2.3% and average price fell 4.8% to $1.878 per dozen.
- Production increased 7.4%; company-produced eggs were 86% of sales, versus 82% a year earlier. Contract production represented 9% of production, up from 5%.
- Capital spending was $6.5 million, down from $23.9 million a year earlier, reflecting completion of several major expansion projects. Cash increased $1.4 million during the quarter.
Outlook, risks, and unusual items
- No quantified earnings or revenue guidance is provided. Management said the fiscal Q1 Urner-Barry index averaged $0.94 per dozen, up 25.3% year over year, and had continued rising after quarter-end. However, it did not expect sustained pricing improvement until egg supply and demand are more balanced.
- Management expected significant 2017 corn and soybean crops, alongside the large 2016 crops, to support adequate feed-ingredient supply in fiscal 2018. Egg prices and feed costs remain volatile and outside the company’s control; results are seasonal.
- The company expects future farm expansion to focus on cage-free or cage-free-convertible facilities to meet customer transition commitments. Approved projects had $1.5 million of projected costs remaining at September 2. The company also expected to contribute approximately $7 million more to its 50% Red River joint venture; cumulative contributions were $55.6 million as of September 28.
- Hurricanes after quarter-end disrupted operations in Texas, Florida, and Georgia, but management reported no material loss of egg production.
- The company recorded an $8.3 million income tax benefit and a $16.0 million net loss attributable to Cal-Maine. Its dividend policy requires recovery of cumulative losses before dividends resume; cumulative losses to recover were $90.6 million, and no Q1 FY2018 dividend was payable.
- Egg antitrust litigation remains pending. Management said a material adverse outcome remains reasonably possible, but the amount of any exposure could not be estimated and no related adjustment was recorded. Standby letters of credit totaled $4.2 million, collateralized by cash.
- Management believed cash, investments, and operating cash flows would fund projected needs for at least 12 months; the filing cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether stronger egg prices persist and whether industry supply moderates enough to improve profitability.
- Progress and remaining costs for cage-free projects and the Red River joint venture, including the company’s future funding needs.
- Developments in the antitrust cases, including potential exposure that management says cannot currently be estimated.
- Cash generation and liquidity while the company continues to report losses and remains unable to resume dividends under its policy.