Business context and reporting period
Cal-Maine Foods, Inc. filed this Form 10-K for the fiscal year ended May 31, 2014 (52 weeks). The filing also reports fourth-quarter results for the 13 weeks ended May 31, 2014. Thus, despite the request metadata, this is not a 2013 Q4 filing. Cal-Maine is the largest U.S. shell-egg producer and marketer; it sold 1,013.7 million dozen eggs in FY2014, about 23% of domestic consumption, and operates as a single segment.
Financial performance and position
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $1,440.9 million | $1,288.1 million |
| Gross profit / margin | $302.8 million / 21.0% | $214.5 million / 16.7% |
| Operating income / margin | $146.1 million / 10.1% | $59.6 million / 4.6% |
| Net income attributable to Cal-Maine | $109.2 million | $50.4 million |
| Diluted EPS | $4.52 | $2.10 |
| Operating cash flow | $123.9 million | $57.5 million |
| Capital expenditures | $59.2 million | $26.3 million |
| Total debt at year-end | $61.1 million | $65.0 million |
| Working capital / current ratio | $324.3 million / 3.68 | $284.7 million / 3.19 |
Cash and cash equivalents were $14.5 million, while current available-for-sale investments were $194.7 million. Total assets were $811.7 million and stockholders’ equity was $594.7 million. The company reported $24.5 million of cash dividends paid and $10.7 million of debt principal payments during FY2014; year-end accrued dividends payable were $10.5 million.
In Q4 FY2014, net sales were $371.6 million, gross profit $91.3 million, and net income attributable to Cal-Maine $31.5 million, or $1.31 per basic share. Q4 FY2013 sales were $325.9 million and net income was a loss of $3.8 million, including a legal settlement expense.
Material changes versus prior period
- FY2014 sales rose 11.9%; shell-egg dozens sold increased 6.9% and average shell-egg selling price rose 4.7% to $1.362 per dozen.
- Feed cost fell 9.3% to $0.49 per dozen produced. Higher egg prices and lower feed costs lifted gross margin to 21.0% from 16.7%.
- Operating income increased substantially, also reflecting the absence of FY2013’s $28.0 million antitrust legal settlement expense.
- SG&A rose 23.4% to $156.7 million; as a share of sales it increased to 10.9% from 9.9%. The increase included higher specialty-egg, delivery, and other costs, including a $4.4 million expense from remeasurement of Maxim acquisition contingent consideration.
- Net other income was broadly stable at $15.8 million, but its composition changed: patronage income declined $8.2 million, partly offset by a $4.0 million noncash gain from remeasuring the Delta Egg investment upon acquisition.
- Operating cash flow more than doubled, while capital expenditures increased. Cash declined $10.5 million over the year, partly reflecting investment purchases, capital spending, dividends, and the Delta Egg purchase.
- Specialty and co-pack specialty eggs together represented about 28.1% of shell-egg sales dollars, up from about 27.0%; their share of dozen volume also increased.
Outlook, risks, contingencies, and unusual items
- Management gave no specific earnings or revenue guidance. It expected improved 2014 crop yields to increase corn and soybean-meal supplies for FY2015, but cautioned that feed prices would remain volatile. USDA data cited in the filing showed higher U.S. layer numbers and chick hatchings, which could pressure egg prices.
- Management said cash balances, investments, borrowing capacity, and operating cash flows should be sufficient for projected capital needs. Approved construction projects totaled $110.2 million, with $63.3 million remaining at May 31, 2014.
- Results remain highly sensitive to volatile wholesale egg prices and corn and soybean-meal costs. Feed represented about 66% of farm egg production costs. Seasonality generally depresses sales and income in the first and fourth fiscal quarters.
- Customer concentration is significant: Wal-Mart and Sam’s Club together accounted for 28.2% of FY2014 sales; the top ten customers accounted for 68.5%.
- Cal-Maine completed the purchase of its joint venture partner’s 50% interest in Delta Egg for $17.0 million on March 1, 2014. The acquisition generated a $4.0 million noncash remeasurement gain; acquired operations contributed $4.7 million of revenue and $1.3 million of net income after acquisition.
- Antitrust litigation remains a material uncertainty. Direct-purchaser class settlement received preliminary approval, and certain individual cases were settled; however, remaining cases could still result in a material adverse outcome. The company said exposure could not be estimated and no additional amount was accrued.
- EPA and Mississippi regulators alleged potential environmental violations at the Edwards, Mississippi facility; the company reached an agreement in principle to settle those claims and did not expect a material operating impact. Management considered material loss in the Oklahoma watershed case remote.
- Two fires damaged pullet houses during FY2014. The company intended to seek insurance reimbursement and said the incidents did not materially affect FY2014 results.
- Other key risks include avian disease, product contamination and recalls (the company does not insure recall losses), feed and egg price volatility, animal-welfare-related costs, acquisition integration, and controlling-stockholder influence. The Adams family held 52.7% of total voting power as of July 2014.
Important facts for investors to verify
- Whether higher egg prices and lower feed costs persist, and the resulting effect on margins and cash generation.
- Progress and remaining exposure in the antitrust litigation, including court approval and terms of settlements.
- Insurance recovery and rebuilding costs associated with the FY2014 fires.
- Execution, funding, and returns on the approved capital projects and Delta Egg acquisition.
- Customer concentration, specialty-egg growth, and the extent to which specialty sales cushion commodity-price cycles.
- Debt covenant compliance and liquidity after capital spending, dividends, and planned expansion.