Cal-Maine Foods, Inc. — Form 10-Q Summary
Business context and period: Cal-Maine produces, processes, markets and distributes shell eggs, with one operating segment. This report covers the 13 weeks ended September 1, 2018 (fiscal 2019 first quarter), compared with the 13 weeks ended September 2, 2017. Results are subject to seasonal and substantial egg-price volatility.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $340.6 million | $262.8 million |
| Gross profit / margin | $57.1 million / 16.8% | $17.3 million / 6.6% |
| Operating income (loss) / margin | $12.7 million / 3.7% | $(24.4) million / (9.3)% |
| Net income (loss) attributable to Cal-Maine | $12.4 million | $(16.0) million |
| Diluted earnings (loss) per share | $0.26 | $(0.33) |
| Net cash from (used in) operating activities | $21.2 million | $(21.5) million |
- Sales rose 29.6%, principally reflecting higher shell-egg prices. Dozens sold increased 0.2% to 250.1 million, while average shell-egg selling price increased 28.5% to $1.307 per dozen.
- Non-specialty shell-egg price rose 46.2% to $1.111 per dozen; specialty price increased 0.6% to $1.890, while specialty dozens sold grew 9.7%. Egg-product sales increased to $12.1 million from $6.1 million, largely as selling price per pound rose.
- Cost of sales increased 15.5% to $283.5 million, less than the sales increase. Feed cost per dozen rose 10.1% to $0.413, and outside egg purchase cost per dozen rose 37.8% to $1.35. Higher selling prices drove the improvement in gross profit.
- SG&A increased 6.7% to $44.5 million. Other income was $3.8 million, compared with expense of $0.1 million, including improved affiliate earnings and higher interest income. The effective tax rate was 23.2%, versus a 34.3% benefit rate in the prior-year loss quarter.
Liquidity, debt and capital
- At September 1, 2018, cash was $49.0 million and current investment securities were $272.4 million. Working capital was $490.6 million and the current ratio was 5.88, compared with $479.7 million and 5.45 at June 2, 2018.
- Total debt and capital lease obligations, including current maturities, were $4.8 million, down from $6.1 million at June 2, 2018. The company had no borrowings under its new $100 million senior secured revolving credit facility; $4.2 million of standby letters of credit were outstanding.
- Operating cash flow was $21.2 million. Investing activities used $2.2 million, including $9.2 million in property and equipment purchases and $4.3 million invested in unconsolidated entities. Financing activities used $18.4 million, including $17.1 million in dividend payments. Cash increased $0.6 million during the quarter.
- The company accrued a quarterly dividend of $0.085 per share under its policy of paying one-third of quarterly net income attributable to Cal-Maine, subject to cumulative profitability conditions. Management said cash, investments, operating cash flow and the revolver should fund projected needs for at least 12 months.
Changes, outlook and risks
- Management attributed the more favorable market environment versus a year earlier to strong retail demand and improving institutional-food demand, despite a larger laying flock. It noted USDA reports of increased chick hatchings, indicating potential future supply growth and lower selling prices.
- Production was 2.0% lower year over year, partly reflecting flock rotations intended to maximize production for the holiday season. Feed ingredients were expected to be amply supplied based on USDA crop estimates, but grain prices remained volatile and international tariffs created uncertainty.
- Cal-Maine is investing in cage-free and convertible facilities to respond to customer transition commitments. Approved construction projects totaled $42.4 million, with $34.8 million remaining projected cost as of September 1, 2018.
- Key risks include volatile egg prices and demand, feed-cost changes, disease and weather, product recalls, and the ability to meet cage-free and other specialty-egg demand. Management cautioned that quarterly results are not necessarily indicative of full-year results and provided no specific earnings or price guidance.
- Egg-products antitrust claims remain pending. The company is defending renewed summary-judgment motions; no trial date was set. Management said a material adverse outcome remains reasonably possible, but the potential monetary exposure cannot currently be estimated. Other claims were not expected by management to materially affect results or financial position.
- The company adopted the new revenue-recognition standard retrospectively with no effect on reported results or financial position. It did not expect the new lease standard to have a material impact based on its assessment to date, which was not complete.
Most important facts for investors to verify
- Whether higher egg prices and demand persist, particularly as flock supply and chick hatchings increase.
- Whether feed and purchased-egg costs rise further, and whether selling prices continue to exceed those cost increases.
- Progress, remaining costs and returns on cage-free and convertible-facility projects and related customer commitments.
- Developments in the antitrust litigation, including rulings on summary judgment and any eventual exposure.
- Compliance with credit-facility covenants and the company’s ability to maintain liquidity while funding construction and dividends.