Cal-Maine Foods, Inc. — Form 10-Q Summary
Business context and period: The company produces, processes, markets, and distributes shell eggs and egg products. This unaudited report covers the 13 weeks ended August 31, 2013 (fiscal 2014 first quarter); comparisons are with the 13 weeks ended September 1, 2012. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Quarter ended Aug. 31, 2013 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $319.5 | $272.9 | +17.1% |
| Gross profit / margin | $44.9 / 14.1% | $44.7 / 16.4% | Margin down 2.3 percentage points |
| Operating income / margin | $11.1 / 3.5% | $15.6 / 5.7% | Down 29.0% |
| Net income attributable to Cal-Maine | $8.8 | $9.4 | Down 7.0% |
| Diluted earnings per share | $0.36 | $0.39 | Down $0.03 |
| Cash from operating activities | $(8.4) | $(17.8) | Cash use improved by $9.4 |
- Sales growth reflected higher egg volumes and selling prices, as well as the Maxim acquisition completed in November 2012. Dozens sold rose 15.4% to 242.5 million; excluding the acquisition, sales rose 6.9% and dozens sold increased 3.9%.
- Average shell-egg selling price was $1.253 per dozen, up 1.2%. Feed cost per dozen produced rose 6.7% to $0.544, contributing to higher cost of sales and lower gross margin. Feed represented about 68% of farm egg production cost.
- Other income was $2.7 million, versus other expense of $0.9 million in the prior-year quarter. The current period included $1.9 million of royalty income; net interest expense declined by $0.5 million.
- At August 31, cash was $22.4 million and current available-for-sale investments were $141.8 million. Working capital was $293.4 million and the current ratio was 3.78, compared with $284.7 million and 3.19 at June 1, 2013.
- Total debt, including current maturities, was $62.3 million, down from $65.0 million at June 1. The company reported compliance with its loan covenants.
- Investing activities provided $8.3 million, principally reflecting net investment-security sales; capital expenditures were $11.5 million. Financing used $2.5 million, including $2.7 million of debt principal payments. Cash declined $2.6 million during the quarter.
Changes, outlook, risks, and unusual items
- Despite higher sales, gross profit was nearly unchanged as cost of sales increased 20.3%, exceeding sales growth. Operating income and net income fell year over year. SG&A increased 16.2%, including a $1.1 million charge from remeasurement of acquisition-related contingent consideration.
- The company said improved weather and expected 2013–2014 crop yields had eased feed supply concerns and that it expected lower feed costs for the remainder of fiscal 2014, while noting feed prices cannot be predicted with certainty. Results are seasonal and highly sensitive to volatile egg prices, supply and demand, and commodity costs; the quarter is not necessarily indicative of full-year results.
- Management expected cash, investments, borrowing capacity, and operating cash flows to fund current and projected capital needs. Ongoing projects included cage-free and other production expansions, with disclosed project costs ranging from approximately $7.7 million to $28.9 million and completion dates extending through fiscal 2015.
- Operating cash use was attributed primarily to payment of the $28.0 million egg-antitrust settlement. The company had agreed to settle direct-purchaser class claims for that amount; court approval was pending. Indirect-purchaser and seven non-class cases remained, and management said a material adverse outcome remained reasonably possible but exposure could not then be estimated.
- Other disclosed contingencies included an EPA/Mississippi environmental matter for which a loss was reasonably possible but not estimable, a Florida antitrust investigation with no wrongdoing allegations, and a 50% guarantee of approximately $7.6 million of a joint venture’s debt; management considered payment under the guarantee unlikely. The company also reported a $0.6 million contribution to its retirement plan to resolve an IRS compliance matter.
- The quarterly dividend was $0.068 per share under the company’s policy of paying one-third of qualifying quarterly income, reduced by the prior fiscal fourth-quarter loss. The filing reported no material changes in previously disclosed risk factors or market-risk disclosures.
Important facts for investors to verify
- Whether the court approved the $28.0 million direct-purchaser settlement and how the remaining egg-antitrust and environmental matters develop.
- Whether expected feed-cost relief materializes and how egg prices, production volumes, and seasonal demand affect margins.
- Progress, remaining spending, and completion timing for the production and cage-free expansion projects.
- Cash generation and liquidity after the legal-settlement payment, capital spending, and planned debt repayments.
- The filing states that results for this 13-week period are not necessarily indicative of the fiscal year ending May 31, 2014.