Cal-Maine Foods, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2024, the 13 weeks ended September 2, 2023. Comparisons are with the 13 weeks ended August 27, 2022, unless otherwise stated. Amounts below are in U.S. dollars.
Business context and performance
Cal-Maine is a vertically integrated producer, processor, marketer and distributor of shell eggs, with one reportable operating segment. Its results are highly sensitive to volatile egg selling prices and feed costs. The quarter’s sharp decline in conventional egg prices drove a steep year-over-year earnings decline.
Key financial metrics
| Metric | Quarter ended September 2, 2023 | Prior-year quarter |
|---|---|---|
| Net sales | $459.3 million | $658.3 million |
| Gross profit and margin | $45.4 million; 9.9% | $217.5 million; 33.0% |
| Operating income (loss) | $(6.8) million; (1.4)% margin | $163.9 million; 24.9% margin |
| Net income attributable to Cal-Maine | $0.9 million; $0.02 per diluted share | $125.3 million; $2.57 per diluted share |
| Net cash provided by operations | $23.7 million | $172.8 million |
| Capital expenditures | $26.7 million | $27.7 million |
- Conventional shell egg sales were $225.3 million, down from $425.6 million; specialty shell egg sales were $208.7 million, up from $200.8 million. Egg product sales were $22.2 million, down from $27.6 million.
- Average selling price per dozen was $1.589 for all shell eggs: $1.241 conventional and $2.278 specialty. The prior-year overall average was $2.275. Total shell egg volume sold declined 0.8% to 273.1 million dozen.
- Feed cost per dozen produced fell 10.5% to $0.597, while other farm production cost per dozen rose 15.8% to $0.439. Total farm production cost per dozen decreased 1.0% to $1.036.
- Interest income was $7.3 million, compared with $0.9 million, reflecting higher investment balances and rates. Income tax expense was $0.3 million; the reported effective rate was 43.9%, affected by the noncontrolling-interest loss.
Liquidity, debt and capital
- At September 2, 2023, cash and cash equivalents were $360.3 million and current available-for-sale investment securities were $249.6 million. Current assets were $1,064.1 million and current liabilities $126.4 million.
- Working capital was $937.7 million and the current ratio was 8.4. The company had no long-term debt outstanding and had made no borrowings under its $250 million revolving credit facility; $4.3 million of standby letters of credit were outstanding.
- Cash increased $67.5 million during the quarter. Operating cash flow was $23.7 million; investing activities provided $80.9 million, mainly reflecting investment-security maturities and sales; financing activities used $37.0 million, primarily for dividends.
- Management said available cash, investments, operating cash flows and the credit facility should fund current cash needs for at least the next 12 months. Approved construction projects had $99.7 million of projected costs remaining as of September 2, 2023.
Material changes, outlook and risks
- Sales fell 30.2% year over year. Gross profit declined $172.1 million, and the company moved from $163.9 million of operating income to a $6.8 million operating loss. Management attributed the deterioration primarily to lower conventional egg prices and higher labor costs, partly offset by lower feed costs.
- Conventional egg prices declined as U.S. supply recovered from the recent highly pathogenic avian influenza (HPAI) outbreak. Management said the U.S. layer flock had largely recovered but remained slightly below its five-year average; no positive HPAI tests had occurred at company-owned or contracted facilities as of October 3, 2023. Future outbreaks remain uncertain.
- Customers’ cage-free targets and state requirements create production and investment demands, while customer commitments for specific volumes are generally limited. Some customers revised their announced goals from exclusively cage-free by 2026 to 70% cage-free by 2030. Cage-free revenue was 33.0% of shell egg revenue in the quarter.
- On September 28, 2023, after quarter-end, Cal-Maine agreed to acquire substantially all assets of Fassio Egg Farms’ shell egg production and processing business in Utah, including facilities with capacity for approximately 1.2 million laying hens, primarily cage-free. The transaction was expected to close in fiscal 2024’s second quarter, subject to customary conditions.
- No specific earnings or revenue guidance was provided. Management noted continued uncertainty around egg prices and demand, corn and soybean meal costs, labor, inflation and interest rates, HPAI, cage-free demand and pending litigation.
Contingencies and unusual items
- In the Kraft/General Mills/Nestle processed-egg antitrust matter, trial was set for October 17, 2023. Management said a material adverse outcome was reasonably possible, but the potential monetary exposure could not be estimated; no adjustment was recorded in the financial statements.
- In Oklahoma watershed litigation, the court found defendants liable and directed the parties to pursue remedies. Management considered a material loss reasonably possible but said the amount could not be estimated; no penalties had been assessed in the court’s findings described in the filing.
- The Texas state egg-pricing case was remanded for further proceedings after the Texas Supreme Court denied review on September 29, 2023. A related consumer class-action dismissal was on appeal. Management assessed material loss risk in these Texas matters as remote.
- The quarter included receipt of a $33.2 million federal tax refund, plus related interest, associated with carrying back fiscal 2021 net operating losses; the income tax receivable declined to $33.8 million.
Important facts for investors to verify
- Whether conventional egg prices and volumes recover or weaken further, and the resulting impact on margins and cash generation.
- Feed-cost trends, labor availability and costs, and the pace and financial return of cage-free capital spending.
- Progress, closing conditions, purchase terms and integration effects of the Fassio acquisition.
- Developments and any potential financial exposure in the processed-egg antitrust and Oklahoma watershed cases.
- Liquidity and funding needs relative to the $99.7 million of remaining approved construction costs and other planned investments.