Cal-Maine Foods, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first 39 weeks ended February 29, 2020; comparisons are to the periods ended March 2, 2019. The filing was signed March 30, 2020. Amounts below are in millions unless otherwise stated.
Business context and results
Cal-Maine is an integrated producer, processor, marketer and distributor of shell eggs, with one operating segment. Its results are highly sensitive to volatile egg prices and feed costs. Shell eggs accounted for approximately 97% of sales in both comparison periods.
| Metric | 13 weeks ended Feb. 29, 2020 | Prior-year quarter | 39 weeks ended Feb. 29, 2020 | Prior-year period |
|---|---|---|---|---|
| Net sales | $345.6 | $384.0 | $898.3 | $1,080.6 |
| Gross profit / margin | $49.8 / 14.4% | $82.4 / 21.5% | $58.1 / 6.5% | $210.1 / 19.4% |
| Operating income (loss) / margin | $5.2 / 1.5% | $38.2 / 10.0% | $(74.8) / (8.3)% | $76.2 / 7.1% |
| Net income (loss) attributable to Cal-Maine | $13.7 | $39.8 | $(42.1) | $74.0 |
| Basic earnings (loss) per share | $0.28 | $0.82 | $(0.87) | $1.53 |
Revenue, margins and material changes
- Quarterly sales fell 10.0%, primarily because the average shell-egg selling price declined 10.0% to $1.236 per dozen. Dozens sold were nearly flat, down 0.2%.
- For the 39-week period, sales declined 16.9%; average shell-egg price fell 16.8% to $1.107 per dozen, while volume increased 0.3%.
- Non-specialty egg prices were down 12.3% for the quarter and 23.2% year to date. Specialty egg prices fell 3.4% and 3.0%, respectively; specialty volumes declined 7.1% and 6.0%.
- Quarterly cost of sales decreased 1.9%, but gross profit declined substantially as lower selling prices more than offset cost reductions. Year-to-date cost of sales decreased 3.5%, while gross profit fell from $210.1 million to $58.1 million.
- Feed cost per dozen produced was $0.406 for the quarter, down 3.6%, and $0.411 year to date, down 1.2%. Farm production costs increased, partly due to higher production and accelerated flock amortization associated with early flock sales.
- Year-to-date results include a $2.9 million noncash fixed-asset impairment related to decommissioning older facilities. SG&A declined 1.7% year to date, while other expenses rose, primarily from higher insurance premiums and charitable donations.
- Other income included $10.1 million of patronage dividends for the 39-week period, versus $10.5 million a year earlier. Equity income from unconsolidated entities decreased to $0.5 million from $4.4 million.
Cash flow, liquidity and capital
- Operating cash flow was a use of $36.5 million for the 39 weeks, compared with $94.6 million provided a year earlier. Cash and equivalents were $67.8 million at February 29, 2020, down $1.5 million from June 1, 2019.
- Investing activities provided $38.3 million net, including $181.5 million from investment-security sales and maturities. Capital spending was $94.6 million, compared with $36.8 million a year earlier.
- Working capital was $355.7 million and the current ratio was 4.97, versus $492.8 million and 7.58 at June 1, 2019. Current assets included $80.9 million of available-for-sale securities.
- The company had no long-term debt outstanding and no borrowings under its $100 million revolving credit facility. Standby letters of credit under the facility totaled $4.2 million. Finance lease obligations were $0.9 million; operating lease obligations were $2.7 million.
- Management said cash, investments, operating cash flows and the revolver should be sufficient for projected needs for at least 12 months. The facility includes a minimum working-capital covenant and a $100 million annual capital-expenditure limit.
- No dividends were paid in the 39-week period. Under the dividend policy, the company reported $61.9 million of cumulative losses to recover before dividends may resume.
Acquisition, outlook, risks and contingencies
- In October 2019, Cal-Maine acquired certain Mahard Egg Farm assets for approximately $45.5 million, including a deferred $1 million payment subsequently paid after quarter-end. The assets included facilities with capacity for about 3.9 million laying hens and permitted capacity up to 8.0 million. Cal-Maine’s ownership of Texas Egg Products increased to 93.2%.
- Management reported that egg prices had risen sharply after quarter-end, reaching record levels by March 27, 2020, and expected continued volatility through fiscal year-end. The filing gives no quantified earnings or revenue guidance.
- COVID-19 had increased consumer demand for eggs and prices since the start of the fourth fiscal quarter. At filing time, facilities were operating normally with no reported supply-chain or delivery disruptions; management emphasized that future effects remained uncertain.
- Management cited oversupply and weak prices during the reported periods, seasonal and market-driven price volatility, feed-commodity exposure, disease and weather risks, and uncertainty around COVID-19. Cage-free laws and customer commitments may require substantial investment and could raise costs that may not be passed on to customers.
- Approved construction projects totaled $125.2 million, with $49.4 million spent and $75.8 million remaining at February 29, 2020. Projects include cage-free facilities and a processing plant, with projected completions through fiscal 2022.
- Remaining egg-products antitrust litigation includes claims by Kraft, General Mills and Nestlé seeking treble damages and injunctive relief. Management believes the likelihood of a material adverse outcome has been reduced, but says a material adverse outcome remains reasonably possible; the exposure cannot currently be estimated. The Kellogg settlement was not material.
Important facts for investors to verify
- Whether post-quarter egg-price increases and pandemic-driven demand persisted, and their effect on realized prices, volumes and margins.
- Whether the company restored positive operating cash flow amid receivables growth, ongoing capital spending and continued market volatility.
- Progress, cost and expected returns on cage-free projects, and the ability to match production with customer commitments and regulatory requirements.
- Integration benefits and liabilities associated with Mahard, including the final purchase-price allocation.
- Developments in the remaining antitrust litigation and any change in the currently unestimable potential exposure.
- Whether liquidity, capital spending and covenant headroom remain adequate under weaker operating conditions.