Business context and reporting period
Cal-Maine Foods, Inc. is the largest U.S. shell-egg producer and marketer, operating as a single segment. This Form 10-K covers the 52-week fiscal year ended June 1, 2013; fiscal 2012 had 53 weeks. Fiscal 2013 includes the acquired Pilgrim’s Pride egg assets from August 10, 2012 and Maxim Production assets from November 15, 2012. The filing also reports fourth-quarter results for the 13 weeks ended June 1, 2013.
Financial performance and position
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $1,288.1 million | $1,113.1 million |
| Gross profit / margin | $214.5 million / 16.7% | $201.8 million / 18.1% |
| Operating income / margin | $59.6 million / 4.6% | $88.7 million / 8.0% |
| Net income attributable to Cal-Maine | $50.4 million | $89.7 million |
| Basic earnings per share | $2.10 | $3.76 |
| Cash flow from operations | $57.5 million | $98.1 million |
Sales increased 15.7%; shell-egg dozens sold rose 7.3% to 948.5 million, and average shell-egg selling price increased 8.0% to $1.301 per dozen. Acquisitions contributed to the growth: excluding them, sales rose 6.6%, while dozens sold declined 2.1%. Feed cost per dozen produced increased 15.4% to $0.541. Gross margin contracted as cost of sales rose faster than sales.
FY2013 included a $28 million pre-tax charge for the proposed direct-purchaser antitrust settlement, reducing after-tax earnings by approximately $17 million, or $0.71 per basic share. FY2012 included a $38.3 million special Eggland’s Best patronage distribution. These items materially affect the year-over-year earnings comparison.
Fourth-quarter net sales were $325.9 million and net income attributable to Cal-Maine was a loss of $3.8 million, or $0.16 per share; the quarter included the antitrust charge. No fourth-quarter dividend was declared. Under the dividend policy, the company said a first-quarter FY2014 dividend would require income exceeding the $3.8 million fourth-quarter loss.
At June 1, 2013, cash and cash equivalents were $25.0 million and current available-for-sale investments were $157.9 million. Working capital was $284.7 million and the current ratio was 3.19. Total debt, including current maturities, was $65.0 million, down from $76.2 million; stockholders’ equity was $518.0 million. Operating cash flow fell primarily because receivables increased, including from higher selling prices late in the year. Investing cash outflow was $88.3 million, including $74.9 million for acquisitions and $26.3 million for capital expenditures. Cash declined $72.1 million to $25.0 million. The company reported compliance with its debt covenants.
Material changes, outlook, risks and unusual items
- Acquisitions and growth: Pilgrim’s Pride and Maxim assets expanded production capacity and contributed to consolidated results. The company continues to pursue acquisitions and facility investment. It reported that cash balances, investments, borrowing capacity and operating cash flows should be sufficient for current and projected capital needs; no numerical earnings or sales guidance was provided.
- Commodity and supply outlook: Management expected improved weather and crop yields in 2013–2014 to provide some feed-cost relief, while warning that feed costs would remain volatile. USDA flock and hatchery data cited in the filing showed year-over-year increases, which could put downward pressure on egg prices. Egg prices are volatile and sensitive to supply, demand and seasonality.
- Legal and regulatory contingencies: The July 2013 agreement in principle to settle direct-purchaser class claims for $28 million was subject to finalization and court approval. It does not resolve indirect-purchaser claims or seven non-class cases; management said remaining litigation could still result in a material adverse outcome, but the exposure could not be estimated. The EPA and Mississippi regulators were investigating potential environmental violations at the Edwards, Mississippi facility; management said a possible loss was reasonably possible but not estimable. An IRS retirement-plan correction also remained under review.
- Other principal risks: Feed-price volatility, changes in wholesale egg prices, disease or contamination and product recalls, customer concentration (top ten customers were 65.8% of sales; Wal-Mart and Sam’s Club together were 30.0%), competition, animal-welfare requirements, environmental compliance, and acquisition integration. The company does not maintain insurance for product-recall losses.
- Capital projects and commitments: Planned and ongoing production projects included cage-free and conventional capacity expansions. Contractual obligations totaled $108.7 million, including $65.0 million of debt principal and the $28.0 million settlement payment. Cal-Maine also guaranteed 50% of Delta Egg Farm’s approximately $7.8 million debt; management considered payment under the guarantee unlikely.
Important facts for investors to verify
- Whether the $28 million direct-purchaser settlement received final court approval and was paid, and the status and potential exposure of remaining antitrust matters.
- Subsequent trends in egg prices, feed costs, industry flock supply and Cal-Maine’s production volumes and margins.
- Cash generation and liquidity after acquisitions, capital spending, debt service and settlement payment; confirm the composition and availability of short-term investments.
- Integration and performance of the acquired businesses, including contingent consideration and any further acquisition-related obligations.
- Outcome of the Edwards environmental investigation and IRS retirement-plan correction, for which the filing did not provide a clear potential final cost.
- Customer concentration, dividend eligibility and any impact of controlling ownership or debt-agreement restrictions on shareholder rights and capital allocation.