Cal-Maine Foods, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended November 26, 2011; comparable periods ended November 27, 2010. Fiscal year ends in late May. Amounts below are in millions except per-share data and where noted. Cal-Maine is a vertically integrated U.S. shell-egg producer and marketer.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | 26 weeks FY2012 | 26 weeks FY2011 |
|---|---|---|---|---|
| Net sales | $290.4 | $234.5 | $534.2 | $424.9 |
| Gross profit / margin | $61.5 / 21.2% | $45.2 / 19.3% | $95.3 / 17.8% | $78.0 / 18.3% |
| Operating income / margin | $35.7 / 12.3% | $22.8 / 9.7% | $41.6 / 7.8% | $30.8 / 7.2% |
| Net income attributable to Cal-Maine | $23.3 | $15.2 | $26.4 | $19.9 |
| Diluted EPS | $0.97 | $0.63 | $1.10 | $0.83 |
Revenue and costs: Q2 sales rose 23.8%, as dozens sold increased 5.9% to 218.1 million and average selling price rose 16.7% to $1.272 per dozen. For the first half, sales increased 25.7%, with volume up 6.6% to 426.2 million dozen and average selling price up 18.2% to $1.196. Shell eggs accounted for about 96% of first-half sales. Q2 feed cost was $0.465 per dozen, up 20.2%; first-half feed cost was $0.474, up 31.3%. Feed represents about 66% of farm egg production cost. Higher egg prices supported Q2 margin improvement, while first-half gross margin declined year over year as feed and outside egg costs increased.
Cash flow and liquidity: First-half operating cash flow was $41.2, compared with $7.6 in the prior-year period. Investing activities provided $1.5, including $62.7 from investment sales and $53.0 of investment purchases; capital expenditures were $12.5. Financing used $9.8, including $6.5 of debt principal payments and $3.5 of dividends. Cash increased $32.9 to $90.6; available-for-sale investments were $109.5. Working capital was $267.9, with a 2.90 current ratio, versus $247.6 and 3.30 at May 28, 2011.
Debt: Total long-term debt, including current maturities, was $81.7 at November 26, down from $88.2 at May 28. The company reported compliance with loan covenants. It also had $5.1 of standby letters of credit, collateralized by cash.
Changes, outlook, and risks
- Q2 SG&A rose 15.2% to $25.8, primarily reflecting higher specialty-egg expense and delivery costs; SG&A declined as a share of sales to 8.9% from 9.6%. First-half SG&A rose 13.8% to $53.6 but declined as a share of sales to 10.0% from 11.1%.
- Management expected feed costs to remain high and increasingly volatile in the year ahead, citing tight corn and soybean supply-demand conditions, weather, transportation, and other commodity factors. Egg prices are volatile and seasonal; results may fluctuate significantly. The filing provides no specific earnings or sales guidance.
- Management said cash, borrowing capacity, and operating cash flows should be sufficient for current and projected capital needs. The company expected to begin a roughly $15.3 million cage-free complex in Bremen, Kentucky, with capacity for about 400,000 hens and expected completion by August 2013.
- The Shady Dale, Georgia fire replacement layer house was completed and at full production. The company had received $0.46 in insurance proceeds and recorded a $0.62 insurance receivable for unreimbursed costs; any gain or loss and business-interruption recovery remained contingent on settlement.
- Egg antitrust litigation: Management considered a material adverse outcome reasonably possible, but said exposure could not be estimated. The company denied the allegations and intended to defend the cases. Other disclosed legal matters included Oklahoma watershed litigation, employee wage-and-hour claims, and chicken-litter cases; the filing did not quantify potential losses for these matters.
- Cal-Maine guarantees 50% of Delta Egg Farm debt, which totaled about $10.3 at period-end; management considered payment under the guarantee unlikely. Risks also include disease, pests, weather, recalls, changing egg/feed prices, and litigation.
Investor facts to verify
- Whether higher shell-egg prices and sales volumes persist, and how feed-cost inflation affects gross margins.
- Progress, total spending, and timing for the Bremen cage-free project and expected capital needs.
- Developments in egg antitrust litigation and any eventual estimate or recognition of exposure.
- Timing and amount of remaining Shady Dale insurance recoveries.
- Cash-flow sustainability, debt reduction, covenant compliance, and the impact of seasonal working-capital needs.