Cal-Maine Foods, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first 39 weeks ended February 28, 2015; comparable periods ended March 1, 2014. The filing is unaudited. The company produces, processes, markets, and distributes shell eggs and egg products. Amounts below are in millions unless otherwise noted.
Financial performance
| Metric | 13 weeks ended Feb. 28, 2015 | 13 weeks ended Mar. 1, 2014 | 39 weeks ended Feb. 28, 2015 | 39 weeks ended Mar. 1, 2014 |
|---|---|---|---|---|
| Net sales | $437.6 | $395.5 | $1,173.1 | $1,069.3 |
| Gross profit | $112.5 | $91.9 | $286.3 | $211.5 |
| Gross margin | 25.7% | 23.2% | 24.4% | 19.8% |
| Operating income | $72.0 | $46.6 | $168.8 | $98.5 |
| Operating margin | 16.4% | 11.7% | 14.4% | 9.2% |
| Net income attributable to Cal-Maine | $50.9 | $42.9 | $115.1 | $77.7 |
| Diluted EPS | $1.05 | $0.89 | $2.38 | $1.61 |
- Revenue and operating drivers: Third-quarter sales rose 10.6%; dozens sold increased 5.2% and average shell-egg selling price increased 6.1% to $1.503 per dozen. For the 39 weeks, sales increased 9.7%, dozens sold rose 4.4%, and average selling price increased 5.7% to $1.415 per dozen.
- Product mix: Specialty shell-egg sales increased to 26.9% of total sales in the quarter from 23.7% a year earlier; specialty dozens sold rose 22.6%. Egg-product sales were $9.7 million for the quarter and $34.7 million for the 39 weeks.
- Costs and margins: Third-quarter cost of sales increased 7.1%, less than sales growth. Feed cost per dozen produced fell 5.0% in the quarter and 9.1% over 39 weeks, helping lift margins. Feed represented about 62% of farm egg production cost in the quarter.
- Other income and taxes: Other income was $5.0 million for the quarter, down from $12.0 million, largely because the prior-year quarter included a $4.0 million noncash gain on the Delta Egg transaction; lower royalty and patronage income also contributed. The 39-week effective tax rate was 34.4%, versus 31.1%, with the comparison affected by prior-year Delta Egg tax items.
Liquidity, cash flow, and debt
- At February 28, 2015, cash was $13.0 million and current available-for-sale investments were $224.8 million. Working capital was $357.9 million; the current ratio was 3.63.
- Long-term debt, including current maturities, was $53.4 million, down from $61.1 million at May 31, 2014. The company reported compliance with debt covenants.
- For the 39 weeks, operating cash flow was $136.4 million, compared with $70.9 million. Investing cash outflow was $97.3 million, including $62.1 million of capital expenditures and $8.2 million invested in Southwest Specialty Eggs. Financing cash outflow was $40.5 million, including $31.9 million of dividends and $7.7 million of debt repayments. Cash declined $1.5 million from fiscal year-end.
- Approved construction projects totaled $110.5 million, of which $80.9 million had been spent by February 28; projected remaining cost was $29.7 million.
Material changes, outlook, and risks
- Results improved substantially year over year, with higher selling prices and lower feed costs supporting gross-margin expansion. Management attributed higher operating cash flow to stronger operating income and the prior-year period’s $28 million legal-settlement payment.
- Management expected favorable 2014 crop supplies to result in lower fourth-quarter fiscal 2015 feed prices than in the comparable prior-year quarter. It stated that cash, investments, borrowing capacity, and operating cash flows should fund current and projected capital needs. No numerical earnings or revenue guidance was provided.
- Management cautioned that USDA reports showed a record-high national laying flock, which could increase supply and pressure egg prices. Egg prices are volatile and seasonal; feed costs are exposed to commodity-market and weather conditions. California’s new egg-production standards took effect January 1, 2015; the company said its California sales had not been material to date and future effects on regional and national supply and pricing remained uncertain.
- Legal matters: The company reported ongoing egg-antitrust litigation. Several claims had been dismissed or settled, but indirect-purchaser and non-class matters remained. Management said a material adverse outcome remained reasonably possible, but monetary exposure could not be estimated and no liability was recorded for these matters. The company also reported an agreement in principle with the EPA and Mississippi regulators to settle claims concerning its Edwards, Mississippi facility; formal settlement documents were being finalized and were not expected to materially affect results.
- Unusual items: The quarter’s year-over-year SG&A comparison benefited from a confidential legal settlement and related legal fees recorded in the prior-year quarter. Fiscal 2015 first-quarter results included $886,000 of insurance gain on fire-related property damage; $60,000 of business-interruption proceeds reduced cost of sales.
- The company effected a 2-for-1 stock split on October 31, 2014; reported share and per-share figures were retroactively adjusted.
Important facts for investors to verify
- Whether egg prices and specialty-egg demand remain strong, and how the record laying flock affects supply and pricing.
- Whether lower feed costs persist and how feed, outside-egg purchases, and operating expenses evolve.
- Progress, spending, completion timing, and expected returns for the $110.5 million approved construction program.
- Developments in remaining antitrust litigation and final terms and costs of the Edwards facility settlement.
- Dividend calculations under the company’s policy of generally distributing one-third of eligible quarterly net income, subject to its cumulative-profit condition and debt restrictions.