Cal-Maine Foods, Inc. — Form 10-Q Summary
Reporting period: The 13- and 26-week periods ended December 1, 2012, compared with periods ended November 26, 2011. Balance sheet figures are as of December 1, 2012, compared with June 2, 2012. Dollar amounts below are in millions unless stated otherwise.
Business context and results
Cal-Maine is an integrated producer, processor, marketer, and distributor of shell eggs. Results are sensitive to volatile egg prices and feed costs, and are seasonal. The quarter included contributions from acquisitions completed in August and November 2012.
| Metric | 13 weeks ended Dec. 1, 2012 | Prior-year quarter | 26 weeks ended Dec. 1, 2012 | Prior-year period |
|---|---|---|---|---|
| Net sales | $328.9 | $290.4 | $601.8 | $534.2 |
| Gross profit | $51.3 | $61.5 | $96.0 | $95.3 |
| Operating income | $20.4 | $35.7 | $36.0 | $41.6 |
| Net income attributable to Cal-Maine | $14.3 | $23.3 | $23.7 | $26.4 |
| Diluted earnings per share | $0.60 | $0.97 | $0.99 | $1.10 |
- Margins: Gross margin was 15.6% for the quarter versus 21.2% a year earlier; operating margin was 6.2% versus 12.3%. For the first 26 weeks, gross margin was 16.0% versus 17.8%, and operating margin was 6.0% versus 7.8%.
- Sales drivers: Quarter egg volume rose 9.2% to 238.1 million dozen and average selling price rose 4.0% to $1.323 per dozen. Excluding acquisitions, quarterly sales increased 6.5% and volume increased 2.0%. For the 26 weeks, sales increased 12.7%; excluding acquisitions, sales increased 8.5%.
- Costs: Quarterly cost of sales rose 21.3%, outpacing sales growth. Feed cost per dozen increased 23.4% to $0.574; management cited higher feed costs, outside egg purchase costs, and acquired operations. SG&A increased 19.8% in the quarter, including higher litigation-related professional fees, delivery costs, and specialty-egg promotions.
- Other income: The quarter included $2.7 million of additional patronage dividends from Eggland’s Best and $1.1 million of mineral-rights royalty income. These helped offset lower operating income.
Cash flow, liquidity, and debt
- Operating cash flow was $8.8 million for the 26 weeks, down from $41.2 million. Investing cash flow was a $28.5 million use, including $74.9 million for acquisitions and $14.9 million of capital spending. Financing cash flow was a $21.3 million use, including $15.6 million of dividends and $5.7 million of debt repayments.
- Cash declined $41.1 million to $56.1 million. Available-for-sale investments were $107.0 million, making cash and investments approximately $163.1 million.
- Working capital was $267.6 million, down from $301.5 million; the current ratio was 2.90 versus 3.14. Total debt, including current maturities, was $70.5 million, down from $76.2 million.
- The company reported compliance with its debt covenants. It had $5.1 million in cash-collateralized standby letters of credit.
Material changes, outlook, and risks
- Acquisitions expanded Texas operations and ownership of Texas Egg Products. The Pilgrim’s Pride assets added capacity for about 1.4 million laying hens; the Maxim assets added facilities for about 3.5 million hens, contracted production, and a feed mill. Maxim consideration included $5.0 million in stock and a contingent earn-out of up to $4.4 million; management recorded no earn-out liability, assessing material payout as remote. Pilgrim’s Pride included a contingent payment valued at about $2.5 million.
- Management expects feed costs to remain high and volatile, citing drought-related crop reductions and tight corn and soybean supply. The filing provides no specific earnings or revenue guidance. Management said cash, investments, borrowing capacity, and operating cash flow should fund projected capital needs.
- Planned projects included a roughly $15.3 million cage-free complex in Kentucky, expected to be completed by August 2013, and a roughly $7.3 million south Texas cage-free expansion, expected in fiscal 2013.
- Egg antitrust litigation remains a material uncertainty. Management considered a material adverse outcome reasonably possible but said monetary exposure could not be estimated. The filing also describes EPA and state allegations concerning potential environmental violations at the Edwards, Mississippi facility; the company was investigating and responding.
- The company guarantees 50% of approximately $8.5 million of Delta Egg Farm debt; management considers payment under the guarantee unlikely. Management reported effective disclosure controls and no material change in internal control during the quarter.
Key investor verification points
- Whether acquired operations, especially Maxim, add earnings and cash flow sufficient to offset acquisition costs and integration risks.
- How sustained feed-cost inflation and changes in egg prices affect margins, volumes, and working capital.
- Developments, potential exposure, and any subsequent rulings or settlements in the egg antitrust and environmental matters.
- Cash generation, acquisition-related commitments and earn-outs, capital spending, and compliance with debt covenants.
- Dividends are tied to the company’s policy of distributing one-third of quarterly net income when policy conditions are met; the reported quarterly dividend was $0.199 per share.