Cal-Maine Foods, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first 39 weeks ended March 2, 2019. Although the request metadata says 2018 Q3, the filing covers fiscal 2019 Q3; comparative periods ended March 3, 2018.
Business context and results
Cal-Maine is a vertically integrated producer and distributor of shell eggs, with one operating segment. Results are highly sensitive to volatile egg prices and feed costs. Specialty eggs include cage-free, organic, brown, and nutritionally enhanced products.
| Metric | 13 weeks ended Mar. 2, 2019 | Prior-year quarter | 39 weeks ended Mar. 2, 2019 | Prior-year period |
|---|---|---|---|---|
| Net sales | $384.0 million | $435.8 million | $1,080.6 million | $1,059.8 million |
| Gross profit | $82.4 million | $120.1 million | $210.1 million | $219.8 million |
| Gross margin | 21.5% | 27.6% | 19.4% | 20.7% |
| Operating income | $38.2 million | $76.2 million | $76.2 million | $11.4 million |
| Net income attributable to Cal-Maine | $39.8 million | $96.3 million | $74.0 million | $54.2 million |
| Diluted EPS | $0.82 | $1.99 | $1.52 | $1.12 |
| Operating cash flow | Not presented by quarter | $94.6 million | $146.1 million |
Third-quarter sales fell 11.9%, mainly because the average shell-egg selling price declined 11.1% to $1.373 per dozen; dozens sold decreased 0.5%. The Southeastern large-egg index was down 19.5% year over year. Specialty shell eggs remained comparatively resilient: quarterly specialty sales rose to $131.1 million from $128.1 million, while specialty dozens sold increased 1.3%. For the 39-week period, sales increased 2.0%, but gross profit declined as production costs rose.
Cash, debt, and liquidity
- At March 2, 2019, cash and cash equivalents were $97.4 million and current available-for-sale securities were $244.5 million. Working capital was $517.6 million; the current ratio was 6.19.
- Total debt and capital lease obligations were $3.1 million, including current maturities, down from $6.1 million at June 2, 2018. No borrowings were outstanding under the $100 million revolving credit facility.
- For the first 39 weeks, investing cash outflow was $13.2 million and financing cash outflow was $32.4 million. Capital expenditures were $36.8 million; the Featherland acquisition cost $17.9 million; dividends paid were $28.5 million.
- Operating cash flow declined by $51.5 million year over year, which management attributed partly to lower accounts payable and higher receivables.
Material changes, outlook, and risks
- Quarterly profitability weakened: operating income fell by half and net income declined substantially, driven principally by lower non-specialty egg prices and higher farm production costs. Feed cost per dozen increased 6.3% in the quarter and 7.5% year to date.
- Year-to-date operating income was much higher than the prior year partly because legal settlement expense fell to $2.3 million from $80.8 million. The prior-year comparison also included a $35 million tax benefit related to the Tax Cuts and Jobs Act; the current quarter recorded $13.6 million of tax expense.
- Management said rising hen numbers—336.1 million in the March 2019 USDA report, up 1.7% year over year—could pressure egg prices in Q4 and through calendar 2019. Management also cited strong demand, especially for specialty eggs, and an expected ample supply of corn and soybeans for the remainder of fiscal 2019, while noting grain-price volatility tied to geopolitical and tariff uncertainty.
- On March 29, 2019, the board approved cage-free and related expansions in Utah, Texas, and Florida. Management expects to fund construction from cash, investments, and operating cash flow and believes liquidity is adequate for at least the next 12 months. The filing describes $148 million of approved expansion projects in the narrative, while its construction-project table totals $201.1 million in projected costs; the scope difference is not explained clearly.
- California Proposition 12 establishes minimum space requirements beginning in 2020 and requires cage-free eggs or egg products sold in California by 2022. The company expects effects on sourcing, production, supply, and pricing beyond California.
- Remaining egg-products antitrust litigation could result in a material adverse outcome. The company states that potential monetary exposure cannot currently be estimated; no reserve for resolution of the remaining matters is reflected. Standby letters of credit totaled $4.2 million and were cash-collateralized.
- The Featherland acquisition closed October 14, 2018 for $17.9 million cash and added facilities with capacity for approximately 600,000 laying hens, a feed mill, and related operations.
Important facts for investors to verify
- Whether the company’s egg-price and supply assumptions for Q4 and calendar 2019 were borne out, particularly given increasing hen numbers.
- The status, timing, and total committed cost of cage-free construction; reconcile the $148 million narrative figure with the $201.1 million project-table total.
- Developments in the remaining antitrust claims, including any change in the company’s assessment or ability to estimate potential exposure.
- Trends in feed costs, non-specialty pricing, specialty-egg volumes and pricing, and operating cash flow.
- Dividend policy and capacity: quarterly dividends generally equal one-third of attributable net income, subject to cumulative-profit and credit-agreement conditions.