CALM

Business Context and Reporting Period

Company: Cal-Maine Foods, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Thirteen and thirty-nine weeks ended February 26, 2011.
Business Overview: The Company is the largest producer and marketer of shell eggs in the United States, engaged in the production, grading, packaging, marketing, and distribution of fresh shell eggs and egg products. Operations are fully integrated, including hatching, flock maintenance, feed manufacturing, and distribution.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Net sales increased 1.3% ($3.5 million) for the quarter and 1.7% ($11.5 million) year-to-date compared to the prior year periods. Volume increased slightly, while average selling prices decreased slightly for the quarter but increased year-to-date.
• Cost of Sales: Increased 6.6% for the quarter and 1.5% year-to-date. The primary driver was a 16.4% increase in feed costs per dozen for the quarter due to higher corn and soybean meal prices.
• Profitability: Operating income decreased 22% for the quarter ($39.0M vs $49.9M) due to higher feed costs and lower selling prices. However, year-to-date operating income remained relatively flat ($69.8M vs $70.1M).
• Other Income: Significantly increased due to patronage refunds and dividends from Eggland's Best ($5.3M) and a $4.8M gain from the sale of non-voting stock in Eggland's Best.
• Liquidity: Cash and cash equivalents decreased by $18.8 million year-to-date, primarily due to net purchases of investments ($32.7M net) and debt principal payments ($25.8M), partially offset by operating cash flows ($59.9M).

Outlook, Risks, and Unusual Items

• Feed Cost Outlook: Management expects feed costs to remain high and increasingly volatile due to low national inventories of corn and soybeans and increased demand from ethanol producers and exports.
• Legal Proceedings (Antitrust): The Company is a defendant in 24 antitrust cases alleging conspiracy to reduce egg supply and raise prices. Two co-defendants have reached settlements (one for $25M), but Cal-Maine denies liability and intends to vigorously defend. The likelihood of a material adverse outcome is now considered "reasonably possible."
• Legal Proceedings (Other): Pending litigation includes chicken litter personal injury cases (outlook favorable), Oklahoma watershed pollution litigation (awaiting court ruling), and a Mississippi wage and hour claim (motion to dismiss filed).
• Casualty Losses:
  • Farwell, TX: A 2009 fire resulted in $11.9M in insurance proceeds received to date. A provisional business interruption claim of $4.0M was recognized. Final settlement expected in Q4 fiscal 2011.
  • Shady Dale, GA: A fire in Q1 fiscal 2011 destroyed one layer house and damaged others. Management expects insurance to substantially cover losses.
• Asset Impairment: Recorded $1.5 million in impairment losses related to South Texas Protein fixed assets during the 39-week period.
• Dividends: Declared dividends of $0.470 per share for the quarter and $0.749 year-to-date, calculated as one-third of net income.

Investor Verification Checklist

• Feed Cost Volatility: Verify current market prices for corn and soybean meal to assess future margin pressure.
• Antitrust Litigation Status: Monitor developments in the egg antitrust class actions, specifically regarding the potential for Cal-Maine to be named in settlements or face trial.
• Insurance Settlements: Track the finalization of the Farwell, TX fire claim and the Shady Dale, GA fire claim to confirm expected recoveries.
• Specialty Egg Growth: Review the continued growth trajectory of specialty egg sales (organic, cage-free) which command higher prices and less cyclical volatility.
• Debt Covenants: Confirm continued compliance with loan covenants, specifically the minimum working capital ratio (1.25:1) and tangible net worth requirements.