Cal-Maine Foods, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first 39 weeks of fiscal 2017, ended February 25, 2017. Comparisons are with the corresponding periods ended February 27, 2016. The company produces, processes, markets and distributes shell eggs; shell eggs generated about 98% of current-period sales.
Financial results
| Metric | 13 weeks ended Feb. 25, 2017 | 39 weeks ended Feb. 25, 2017 |
|---|---|---|
| Net sales | $306.5 million, down 31.8% | $799.9 million, down 50.2% |
| Gross profit / margin | $39.2 million / 12.8% | $33.5 million / 4.2% |
| Operating income (loss) | $(4.6) million | $(92.4) million |
| Net income (loss) attributable to Cal-Maine | $4.1 million; $0.09 per diluted share | $(49.8) million; $(1.03) per diluted share |
- Revenue drivers: Average shell-egg selling price per dozen was $1.130 in the quarter, down 27.9%, and $1.020 year to date, down 46.8%. Dozens sold fell 5.0% in the quarter and 5.3% year to date. Egg-product sales declined 47.9% for the quarter and 70.5% year to date, despite higher pounds sold.
- Profitability: Quarter gross margin fell from 29.5% to 12.8%; year-to-date margin fell from 37.8% to 4.2%. Lower selling prices were the principal pressure. Year-to-date SG&A was $126.0 million, down 6.9%, but operating costs remained high relative to sharply lower sales.
- Cash flow: Operating activities used $57.2 million in the first 39 weeks, versus $332.7 million provided a year earlier. Investing activities provided $66.6 million, including net proceeds from investment-security sales, while financing activities used $6.5 million. Cash increased $2.9 million from fiscal year-end to $31.9 million.
- Liquidity and debt: At February 25, cash was $31.9 million and current investment securities were $157.7 million. Working capital was $392.2 million, down from $542.8 million at May 28, 2016; the current ratio was 5.24 versus 7.50. Total debt, including current maturities, was $22.8 million, compared with $25.6 million. The company reported compliance with its debt covenants.
- Balance sheet: Total assets were $1.085 billion and total liabilities $216.9 million. The income-tax receivable rose to $49.9 million, mainly reflecting tax benefits on current-year losses.
Material changes and notable items
- Egg-market weakness drove the sharp year-over-year deterioration. The company attributed oversupply to higher-than-previously-reported flock estimates, demand for egg products that had not recovered, and export demand still below pre-avian-influenza levels.
- Foodonics was acquired in October 2016 for $68.6 million cash plus $3.0 million deferred consideration. It added production capacity for 1.6 million laying hens, contract-grower capacity for 1.5 million hens, processing and feed facilities, an interest in American Egg Products, and Eggland’s Best licensing rights.
- Happy Hen operations, with current capacity for 350,000 laying hens and a site designed for up to 1.2 million, were included from February 19, 2017. The acquisition closed March 3; its approximately $17.2 million purchase price was recorded in accounts payable and accrued expenses at quarter-end.
- Capital spending included $54.9 million of property and equipment purchases year to date. Approved construction projects totaled $70.1 million, of which $55.3 million had been spent by February 25; approximately $14.8 million remained. The company also expected to contribute about $10 million more to its Red River joint venture.
- No dividends were paid for the first three fiscal 2017 quarters. Under the dividend policy, cumulative losses of $50.2 million had to be recovered before dividends could resume.
- After quarter-end, the company received $5.5 million net from the Deepwater Horizon settlement; it expected to record the recovery in fourth-quarter results.
Outlook, commentary and risks
- Management expected egg markets to remain under pressure and did not expect meaningful improvement until supply and demand were better balanced. It cited recent USDA reports of a declining chick hatch as a possible sign of moderation in flock size, not a firm forecast.
- Management said current cash, investments, borrowings and operating cash flows should be sufficient for projected capital needs for at least the next 12 months. This expectation should be considered alongside negative year-to-date operating cash flow and planned construction and joint-venture spending.
- Expansion plans focus on cage-free or cage-free-convertible facilities to meet customer commitments. Egg prices and feed costs are volatile; feed represented about 58% of farm egg production cost. Other principal risks include disease, weather, customer demand, acquisition execution and litigation.
- Avian-influenza outbreaks had been reported in southeastern poultry operations, but none had affected commercial laying flocks or company locations as of the filing. The company reported enhanced biosecurity measures.
- Egg-industry antitrust litigation remains pending. The company said the likelihood of a material adverse outcome had been reduced by settlements and court rulings, but a material adverse outcome remained reasonably possible; monetary exposure could not be estimated and no accrual was recorded.
- The filing provided no numerical earnings or sales guidance. Management stated interim results were not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether egg prices, sales volumes and egg-product demand recover, and how quickly supply adjusts.
- Actual cash generation and funding needs as cage-free construction and Red River commitments continue.
- Final purchase accounting, integration and operating contribution from Foodonics and Happy Hen.
- Developments in antitrust litigation and any resulting financial exposure.
- Whether and when cumulative losses are recovered sufficiently for dividends to resume.