Business context and reporting period
Cal-Maine Foods, Inc. produces, processes, markets, and distributes shell eggs and egg products. This unaudited Form 10-Q covers the 13 weeks ended August 29, 2015, the first quarter of fiscal 2016; comparisons are with the 13 weeks ended August 30, 2014. Results are seasonal and sensitive to volatile egg prices and feed costs.
Key financial results
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $609.9 million | $356.9 million |
| Gross profit; gross margin | $263.1 million; 43.1% | $81.1 million; 22.7% |
| Operating income; operating margin | $220.1 million; 36.1% | $41.2 million; 11.5% |
| Net income attributable to Cal-Maine | $143.0 million | $27.7 million |
| Diluted earnings per share | $2.95 | $0.57 |
| Operating cash flow | $154.1 million | $38.0 million |
Net sales rose 70.9%. Dozens sold increased 2.8% to 258.8 million, while average shell-egg selling price per dozen increased 65.7% to $2.243. Shell eggs generated approximately 96% of sales. Feed cost per dozen produced fell 13.4% to $0.419; feed represented approximately 61% of farm egg production costs.
At August 29, 2015, cash was $69.4 million and current investment securities were $286.5 million. Working capital was $444.1 million and the current ratio was 2.78. Total debt, including current maturities, was $42.6 million, down from $50.9 million at May 30, 2015; the company made $8.3 million of principal payments, including a $6.0 million prepayment. Cash increased $60.7 million during the quarter. Investing cash outflow was $69.7 million, including $15.3 million of property and equipment purchases and an $18.0 million joint-venture investment; financing cash outflow was $23.7 million, including $15.4 million of dividends.
Material changes and management commentary
- Management attributed sharply higher egg prices primarily to the avian-influenza outbreak, which it estimated had affected approximately 13% of the U.S. laying-hen flock. Southeast large-egg market prices averaged $2.46, $2.14, and $2.85 in June, July, and August, respectively.
- Higher selling prices and lower feed costs drove the gross-margin improvement. Cost of sales still rose 25.7%, principally because outside egg purchases were more expensive, biosecurity costs increased, and processing and packaging costs rose.
- Management expected egg prices to remain high until the national laying flock was replenished, while warning of possible additional avian-influenza outbreaks in fall and winter. No positive tests had occurred at company locations as of the filing; the company said it was increasing biosecurity measures.
- Management said existing cash, investments, borrowing capacity, and operating cash flows should fund current and projected capital needs. Approved construction projects totaled $126.5 million, with $31.1 million remaining at August 29; the company also estimated $18.5 million of further contributions to its 50%-owned Red River joint venture during fiscal 2016.
- No specific earnings or revenue guidance was provided. Management cautioned that quarterly results are volatile and that the quarter’s results are not necessarily indicative of full-year results. Feed prices were expected to remain volatile.
Risks, contingencies, and unusual items
Key risks include egg-price and demand fluctuations, disease and product-recall exposure, volatile corn and soybean-meal costs, California production standards, and pending litigation. California Proposition 2 and AB 1437 took effect January 1, 2015; management noted uncertainty about their effects on production, supply, and prices. Less than 3% of fiscal 2015 egg sales were in California.
The company remains involved in egg-industry antitrust litigation. A direct-purchaser settlement had dismissed the company, but certain plaintiffs were granted additional time to opt out; the company had not decided whether to appeal. The court denied indirect-purchaser class certification, while allowing a possible renewed request for an injunction class. Five non-class cases remained pending. Management said a material adverse outcome remained reasonably possible, but the amount of any exposure could not be estimated; no liability for these matters was reflected in the financial statements.
Other notable items: a $6.0 million debt prepayment resulted in approximately $84,000 of prepayment penalties and deferred financing-fee expense. Prior-year other income included an $886,000 property-damage claim gain. The company reported compliance with its debt covenants and effective disclosure controls.
Important facts for investors to verify
- Whether high egg prices and margins persist as the U.S. laying flock recovers, and whether avian influenza reaches company facilities.
- How egg prices, feed costs, outside egg purchases, and specialty-egg volumes affect future margins and cash generation.
- Progress, remaining costs, and funding requirements for the approved construction projects and Red River joint venture.
- Developments in the antitrust cases, particularly direct-purchaser opt-outs and remaining claims, given that potential exposure was not estimable.
- Liquidity and working-capital trends, including the effects of seasonal operations, accrued taxes, dividends, and planned capital spending.