Cal-Maine Foods, Inc. — Q2 FY2017 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended November 26, 2016; comparisons are to the periods ended November 28, 2015. Cal-Maine produces, processes, markets, and distributes shell eggs and reports one operating segment. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 FY2017 | Q2 FY2016 | 26 weeks FY2017 | 26 weeks FY2016 |
|---|---|---|---|---|
| Net sales | $253.5 million | $546.0 million | $493.4 million | $1,155.9 million |
| Gross profit (loss) | $3.9 million | $211.6 million | $(5.6) million | $474.7 million |
| Operating income (loss) | $(38.0) million | $166.2 million | $(87.9) million | $386.3 million |
| Net income (loss) attributable to Cal-Maine | $(23.0) million | $109.2 million | $(53.9) million | $252.3 million |
| Diluted EPS | $(0.48) | $2.26 | $(1.12) | $5.22 |
| Gross margin | 1.6% | 38.8% | (1.1)% | 41.1% |
- Net sales fell 53.6% in the quarter and 57.3% year to date, primarily as egg selling prices plunged. Average shell-egg selling price was $0.971 per dozen in Q2, down 50.7%, and $0.962 year to date, down 54.3%.
- Dozens sold fell 4.5% in Q2 to 252.2 million and 5.4% year to date to 494.5 million. Specialty eggs were 45.8% of Q2 sales, versus 26.1% a year earlier, though their average selling price also declined.
- Q2 cost of sales decreased 25.4% to $249.6 million, less than the sales decline. Feed cost per dozen fell 7.7% to $0.394 in Q2; other farm production cost per dozen rose 12.2% to $0.294, partly due to facility and conversion projects.
- Income tax benefit was $13.8 million in Q2 and $31.4 million year to date, with effective rates of 37.5% and 36.8%, respectively.
Cash flow, balance sheet, and capital
- For the first 26 weeks, operating cash flow was $(70.2) million, versus $300.5 million provided a year earlier, reflecting sharply lower gross margins. Cash and equivalents ended at $17.5 million, down from $29.0 million at fiscal year-end.
- At November 26, current assets were $484.7 million and current liabilities $82.5 million; working capital was $402.2 million and the current ratio 5.87, versus $542.8 million and 7.50 at May 28, 2016.
- Total debt, including current maturities, was $22.5 million, down from $25.6 million at May 28. The company reported compliance with debt covenants. Available-for-sale current investments were $180.4 million, down from $360.5 million.
- Investing cash flow was $61.8 million provided, including $193.3 million of investment-security sales, offset by $68.6 million for the Foodonics acquisition, $40.6 million of capital expenditures, and $10.8 million invested in the Red River joint venture. No dividends were paid in the period.
- Management said current cash, investments, borrowings, and operating cash flows should fund projected needs for at least twelve months. Approved construction projects totaled $67.2 million, with $21.5 million remaining at November 26; management also estimated about $3.8 million of further Red River joint-venture contributions.
Material changes, outlook, and risks
- Egg-market pressure: Egg prices had declined from the high levels following the 2015 avian-influenza-related supply disruption. Management cited higher industry supply, weaker institutional demand for egg products, and reduced exports as contributors to inventory and pricing pressure. Subsequent to quarter-end, egg prices rose sharply, but management cautioned that prices would remain volatile and depend on supply and recovery in institutional demand.
- Acquisition: On October 16, 2016, Cal-Maine acquired substantially all of Dixie Egg Company’s egg-production assets and certain liabilities for $68.6 million cash plus $3.0 million deferred purchase price. Assets included facilities for 1.6 million laying hens, contract-grower capacity for 1.5 million more, feed operations, and an Egg-Land’s Best franchise; Cal-Maine now owns 100% of American Egg Products. Purchase accounting was preliminary.
- Customer transition and spending: Large customers have announced future cage-free sourcing goals. Cal-Maine expects future expansion to be cage-free or convertible to cage-free, increasing investment needs and execution exposure.
- Other key risks: Results are sensitive to volatile egg prices and feed commodity costs; operational hazards include disease, pests, weather, and product recalls. The filing also notes risks from specialty-egg demand, acquisitions, and pending litigation.
- Antitrust litigation: Several rulings narrowed claims, including dismissal of certain egg-product claims and alleged supply-restriction claims. Remaining cases continue; the company said a material adverse outcome remained reasonably possible, but it could not estimate potential monetary exposure and recorded no related adjustment.
- The company reported no material changes to previously disclosed risk factors or market-risk disclosures. Management stated disclosure controls were effective as of November 26, 2016.
Important facts for investors to verify
- Whether the post-quarter rise in egg prices persisted, and how pricing, volumes, and institutional demand affected subsequent results.
- Whether lower selling prices continue to leave margins and operating cash flow under pressure, and how feed and other production costs evolve.
- Integration and final purchase-price allocation for Foodonics, including the acquired operations’ contribution to results.
- Actual spending and completion of cage-free, convertible, and Red River projects compared with disclosed estimates.
- Developments in the remaining antitrust cases, including any trial schedule, rulings, or changes in the currently unquantifiable exposure.
- The company’s dividend policy: dividends are suspended until cumulative losses since the last dividend-paying quarter are recovered; the filing reported $54.3 million of cumulative losses to recover.