Cal-Maine Foods, Inc. — Q2 Fiscal 2021 Form 10-Q
Business context and period. Cal-Maine produces, processes, markets, and distributes shell eggs and egg products. This filing covers the 13 weeks ended November 28, 2020 (second quarter) and the 26 weeks ended November 28, 2020, compared with the corresponding periods of fiscal 2020. The company operates as one segment.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | 26 weeks FY2021 | 26 weeks FY2020 |
|---|---|---|---|---|
| Net sales | $347.3 million | $311.5 million | $640.1 million | $552.7 million |
| Gross profit | $58.5 million | $29.4 million | $75.2 million | $8.3 million |
| Gross margin | 16.8% | 9.4% | 11.8% | 1.5% |
| Operating income (loss) | $14.5 million | $(16.6) million | $(12.7) million | $(80.0) million |
| Net income (loss) attributable to Cal-Maine | $12.2 million | $(10.1) million | $(7.2) million | $(55.8) million |
| Basic and diluted EPS | $0.25 | $(0.21) | $(0.15) | $(1.15) |
Revenue and margins. Q2 sales rose 11.5%; management attributed the increase to a 5.8% increase in egg selling prices and 4.8% growth in dozens sold. Average shell-egg selling price was $1.227 per dozen, versus $1.160. Specialty egg volume rose 17.7%, while its average selling price fell 1.7%. For the first half, sales increased 15.8%, supported by higher average prices and 4.3% growth in dozens sold.
Q2 farm production cost per dozen decreased 2.6% to $0.722, reflecting lower feed and other farm costs per dozen. For the 26-week period, it fell 3.5% to $0.719. Total cost of sales nevertheless increased 2.4% in Q2 and 3.8% year to date, as production, processing, packaging, and labor costs increased.
Cash flow and liquidity. For the 26 weeks, operating activities used $10.7 million of cash, compared with $74.3 million used in the prior-year period. Investing activities used $20.0 million, including $52.4 million in capital expenditures; net sales and maturities of investment securities exceeded purchases by $29.4 million. Cash declined $30.8 million from fiscal year-end to $47.3 million. At November 28, the company also held $124.6 million of current available-for-sale securities. Working capital was $399.7 million and the current ratio was 5.25.
There was no long-term debt and no borrowing under the $100 million revolving credit facility. The company had $4.3 million of standby letters of credit. Lease obligations totaled approximately $2.9 million, including current and long-term finance and operating leases.
Material changes and management commentary
- Q2 results improved substantially from the prior-year quarter, when conventional egg prices were affected by oversupply. For the first half, the company remained loss-making despite materially narrowing its operating and net losses.
- Management cited favorable retail demand as consumers prepared more meals at home during the pandemic. Q2 dozens sold reached a company second-quarter record; specialty egg volume growth was a significant contributor.
- The company reported $1.4 million of COVID-related costs, excluding medical costs, during the first half, plus $818,000 of COVID-related medical costs. Management said most nonmedical costs related to additional labor.
- The company donated approximately 1 million dozen eggs during the first two quarters of fiscal 2021. It reported employee health protocols, sanitation and biosecurity measures, and suspended nonessential corporate travel.
- Q2 SG&A decreased 4.1%, primarily because the prior-year quarter included a legal settlement. The first-half comparison also benefited from refunded insurance brokerage commissions. Prior-year first-half cost of sales included a $2.9 million facility impairment charge.
- The company adopted the expected-credit-loss accounting standard effective May 31, 2020, recording a $422,000 cumulative increase to retained earnings.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management said existing cash, investments, operating cash flows, and available revolving credit should be sufficient for projected needs for at least 12 months. Approved cage-free and convertible-capacity projects had projected costs of $165.3 million, of which $107.6 million had been spent by November 28. In December 2020, the company announced an additional $40.1 million project to convert capacity at its Guthrie, Kentucky facility.
Management warned that feed costs had begun trending higher and could remain volatile due to export demand, supply disruptions, weather, and trade developments. Results are also exposed to volatile egg prices, feed commodity costs, seasonal demand, COVID-19 impacts, disease and other operating hazards, and the company’s ability to meet demand for specialty eggs and cage-free production.
Pending litigation includes a Texas state price-gouging case on appeal and a consumer class action alleging excessive egg prices during the COVID-19 emergency; management assessed material loss risk in those matters as remote. A remaining processed-egg antitrust case seeks treble damages and injunctive relief. Management said a material adverse outcome is reasonably possible, but exposure cannot currently be estimated. The filing also describes long-running Oklahoma watershed litigation, for which management assessed material loss risk as remote.
Although Q2 was profitable, no dividend was payable under the company’s cumulative-loss policy: $8.6 million of cumulative losses remained to be recovered at the end of the quarter. The August 2020 sale of 6.9 million shares by founder-family selling stockholders was a secondary offering; the company issued no shares and received no proceeds. Approximately 5.0 million related shares remained registered for potential resale, subject to contractual provisions.
Important facts for investors to verify
- Whether improved egg prices and retail demand persist, and whether foodservice demand recovers without disrupting retail supply and pricing.
- How rising feed costs, production volumes, and specialty-egg pricing affect per-dozen costs and margins in subsequent quarters.
- Whether cage-free construction projects remain on schedule and within projected costs, and how capital spending affects cash and liquidity.
- Developments and potential exposure in the processed-egg antitrust case and the Texas COVID-era pricing lawsuits.
- The pace of recovery from cumulative losses and the resulting timing of any future dividend eligibility.
- Potential market effects of resale of the remaining registered family-held shares and the company’s right-of-first-refusal arrangements.