Business Context and Reporting Period
Company: Cal-Maine Foods, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Thirteen and thirty-nine weeks ended February 27, 2010 (Fiscal Year 2010)
Business Overview: The Company is the largest producer and marketer of shell eggs in the United States. Operations are fully integrated, including hatching, growing flocks, feed manufacturing, and egg processing. Results are highly sensitive to volatile egg prices and feed costs (corn and soybean meal).
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Feb 27, 2010 |
39 Weeks Ended Feb 27, 2010 |
39 Weeks Ended Feb 28, 2009 |
|---|---|---|---|
| Net Sales | $271,156 | $688,055 | $715,211 |
| Gross Profit | $74,924 | $139,968 | $166,820 |
| Gross Margin % | 27.6% | 20.3% | 23.3% |
| Operating Income | $49,937 | $70,071 | $106,305 |
| Net Income (Attributable to Cal-Maine) | $34,534 | $46,796 | $69,234 |
| Diluted EPS | $1.45 | $1.96 | $2.91 |
| Cash and Cash Equivalents | $141,223 | Balance Sheet Item | |
| Working Capital | $210,640 | Calculated (Current Assets - Current Liab) | |
| Total Debt (Current + Long-term) | $147,929 | Carrying Value | |
| Net Cash Provided by Operations (39 wks) | $104,261 |
Material Changes vs. Prior Period
- Quarterly Performance (13 Weeks): Net sales increased slightly by 0.4% ($1.2M) due to a 2.7% increase in average selling price per dozen, which offset a 2.7% decrease in volume. Net income increased 12.0% to $34.5M, driven by lower feed costs and higher egg prices.
- Year-to-Date Performance (39 Weeks): Net sales decreased 3.8% to $688.1M. While volume increased 6.6%, the average selling price per dozen dropped 9.2%, leading to a significant decline in gross margin (20.3% vs 23.3% prior year). Net income attributable to the Company decreased 32.4% to $46.8M.
- Cost of Sales: Feed costs per dozen produced decreased 6.2% for the quarter and 9.6% year-to-date due to lower corn and soybean meal prices. However, the decline in selling prices outpaced the decline in feed costs year-to-date.
- SG&A Expenses: Increased 8.7% for the quarter and 15.5% year-to-date. Increases were driven by higher stock-based compensation (due to rising stock price) and increased specialty egg marketing expenses.
- Liquidity: Cash and cash equivalents increased significantly from $66.9M to $141.2M, driven by strong operating cash flows ($104.3M) and a new $30M loan, offset by capital expenditures and dividend payments.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects feed costs to remain relatively high and volatile. Capital expenditures are expected to be funded by operating cash flows and insurance recoveries. The Company anticipates seasonal borrowing needs in the last and first fiscal quarters.
- Unusual Items - Fire at Farwell, Texas: A fire on July 9, 2009, destroyed four layer houses. The Company has received $10M in insurance proceeds and expects full reimbursement for losses. The book value of assets written off and expenses incurred net of reclassifications totaled $9.0M. Construction completion is delayed to January 2011.
- Unusual Items - Auction Rate Securities: The Company holds $32.8M in auction rate securities classified as trading. These are collateralized by a revolving line of credit with UBS. The Company expects to exercise "Rights" to sell these securities back to UBS at par value starting June 30, 2010.
- Legal Proceedings:
- Antitrust Litigation: Named in 16 consolidated cases alleging conspiracy to reduce egg supply and raise prices. No trial date set; motions to dismiss are pending.
- Personal Injury Litigation: Defendant in cases alleging health issues from chicken litter; summary judgment was granted in a bellwether case, but plaintiffs have appealed.
- Environmental Litigation: State of Oklahoma lawsuit regarding watershed pollution; damages claims dismissed, but injunctive relief claims are pending trial conclusion.
- Acquisitions: Completed acquisition of remaining 10% interest in Benton County Foods, LLC ($508k) and final payment on Hillandale, LLC purchase obligation ($8.15M).
Investor Verification Checklist
- Feed Cost Volatility: Verify current market prices for corn and soybean meal to assess future margin pressure.
- Insurance Recovery: Monitor the final resolution of the Farwell, Texas fire claim to confirm the $10M+ proceeds cover all losses and lost profits.
- Auction Rate Securities Liquidity: Confirm the status of the UBS settlement and the ability to liquidate the $32.8M in securities at par value in June 2010.
- Antitrust Exposure: Track the status of the consolidated egg antitrust litigation, specifically the outcome of motions to dismiss and potential settlement discussions.
- Specialty Egg Growth: Assess the sustainability of the growth in specialty egg sales (organic, cage-free) which command higher prices but incur higher marketing costs.