Cal-Maine Foods, Inc. — Fiscal 2020 First-Quarter 10-Q
Reporting period: The 13 weeks ended August 31, 2019, compared with the 13 weeks ended September 1, 2018. Cal-Maine is an integrated producer, processor, marketer and distributor of shell eggs; specialty eggs include cage-free, organic, brown and nutritionally enhanced products.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $241.2 million | $340.6 million |
| Gross profit (loss); margin | $(21.1) million; (8.8)% | $57.1 million; 16.8% |
| Operating income (loss); margin | $(63.5) million; (26.3)% | $12.7 million; 3.7% |
| Net income (loss) attributable to Cal-Maine | $(45.8) million | $12.4 million |
| Diluted EPS | $(0.94) | $0.26 |
| Operating cash flow | $(60.7) million | $21.2 million |
| Capital expenditures | $23.7 million | $9.2 million |
- Net sales fell 29.2%, chiefly because the average shell-egg selling price declined 30.0%, to $0.915 per dozen from $1.307. Dozens sold increased 1.7%, to 254.4 million.
- Non-specialty shell-egg prices fell 43.8% to $0.624 per dozen; specialty prices fell 1.4% to $1.863, while specialty volume declined 5.1%.
- Cost of sales declined 7.5% to $262.3 million, but remained above revenue. Farm production cost per dozen rose 2.3% to $0.748; feed cost per dozen was nearly flat at $0.411.
- The quarter included a $2.9 million noncash impairment charge for older production facilities being decommissioned. SG&A declined 4.6% to $42.5 million.
- Cash and cash equivalents were $46.4 million at August 31, down from $69.2 million at June 1. Current investment securities were $189.7 million. Working capital was $427.5 million and the current ratio was 6.66.
- Long-term debt, including current maturities, was $0.75 million; no borrowings were outstanding under the $100 million revolving credit facility. Finance lease obligations totaled $1.0 million. The company reported compliance with loan covenants.
Changes, outlook and risks
- Management attributed weaker results primarily to lower egg-market prices and an unfavorable supply-demand balance. The average Urner Barry Southeastern large-egg index was down 40.7% year over year. The USDA reported 331.4 million laying hens as of September 1, 2019, about 800,000 more than a year earlier; management said rising supply could pressure prices in the second quarter and through fiscal 2020.
- Management noted strong first-quarter demand trends, particularly for specialty eggs, but provided no specific earnings or revenue guidance. Egg prices are volatile and seasonal; results are generally weaker in the first and fourth fiscal quarters.
- The company expects adequate corn and soybean supplies for fiscal 2020 based on USDA crop estimates, while warning that trade and tariff uncertainty could increase feed-price volatility.
- Approved cage-free and convertible-capacity projects totaled $187.5 million, with $131.8 million of projected spending remaining at quarter-end. The Delta, Utah expansion is expected to add approximately 3.4 million cage-free hens, with project completion expected by early 2022. Management said available cash, investments, operating cash flows and the revolver should fund projected needs for at least 12 months.
- No dividend was paid. Under the company’s policy, cumulative losses of $65.6 million had to be recovered before a dividend could be paid following a profitable quarter.
- Remaining egg-products antitrust litigation involves Kraft, General Mills, Nestlé and Kellogg. The case was remanded to an Illinois federal court for trial; management said a material adverse outcome remained reasonably possible, but the amount of any exposure could not be estimated.
- The company adopted lease accounting guidance effective June 2, 2019; management said adoption did not materially affect the financial statements. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether egg-market prices and the supply-demand balance improve or further pressure margins and operating cash flow.
- Progress, remaining costs and timing for the cage-free projects, including the Delta expansion.
- Cash burn, investment-security balances and continued access to the revolving credit facility as capital spending proceeds.
- Developments in the remaining antitrust case, including any court orders, trial schedule or estimate of potential exposure.
- How quickly cumulative losses are recovered and whether the dividend policy permits distributions to resume.