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Share
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(Exact name of registrant as specified in its charter)
iDelaware
i64-0500378
(State
or other jurisdiction of incorporation or organization)
(I.R.S Employer Identification No.)
i3320 Woodrow Wilson Avenue, iJackson,
iMississippii39209
(Address of principal executive offices) (Zip Code)
(i601)
i948-6813
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
iCommon Stock, $0.01 par value per share
iCALM
iThe
NASDAQ Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
iYes☑No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☑No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yesi☐ No ☑
There
were i43,893,117 shares of Common Stock, $0.01 par value, and i4,800,000 shares of Class A Common Stock, $0.01 par
value, outstanding as of January 6, 2020.
Note 1 - iSummary
of Significant Accounting Policies
i
Basis of Presentation
The unaudited condensed consolidated financial statements of Cal-Maine Foods, Inc. and its subsidiaries (the "Company,""we,""us,""our") have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Therefore, they do not include all of the information and
footnotes required by generally accepted accounting principles (GAAP) in the United States of America for complete financial statements and should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended June 1, 2019. These statements reflect all adjustments that are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented and, in the opinion of management, consist of adjustments of a normal recurring nature. Operating results for the interim periods are not necessarily indicative of operating results for the entire fiscal year.
i
Fiscal
Year
The Company's fiscal year-end is on the Saturday nearest May 31. Each of the three-month periods and year-to-date periods ended on November 30, 2019 and December 1, 2018 included 13 and 26 weeks, respectively.
iUse of Estimates
The
preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that effect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
i
Leases
The Company determines if an arrangement
is a lease at inception of the arrangement and classifies it as an operating lease or finance lease. We recognize the right to use an underlying asset for the lease term as a right-of-use (ROU) asset on our balance sheet. A lease liability is recorded to represent our obligation to make lease payments over the term of the lease. These assets and liabilities are included in our Condensed Consolidated Balance Sheet in Finance lease right-of-use asset, Operating lease right-of-use asset, Current portion of finance lease obligation, Current portion of operating lease obligation, Long-term finance lease obligation, and Long-term operating lease obligation.
The Company records ROU assets and lease obligations based on the discounted future minimum lease payments over the term of the lease. When the rate implicit in the lease is not easily determinable,
the Company’s incremental borrowing rate is used to calculate the present value of the future lease payments. The Company elected not to recognize ROU assets and lease obligations for leases with an initial term of 12 months or less. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
Nature of Leases
The company leases certain office spaces, trucks, processing machines, and equipment to support our operations under cancelable and non-cancelable contracts.
Corporate
and Field Offices
We lease office space for administrative employees at some of our farms. These contracts are typically structured with initial non-cancelable terms of three to ten years. To the extent our corporate and field office contracts include
renewal options, we evaluate whether we are reasonably certain to exercise those options on a contract
by contract basis based on expected future office space needs.
Trucks
We assumed several non-cancelable operating leases for trucks from a prior acquisition. The initial terms on these leases ranged from five to seven years. We do not intend to exercise renewal options beyond the initial term.
Processing machines and other equipment
We lease a processing machine through a finance lease arrangement assumed in an acquisition. The lease contains a purchase option at the end of the term that we intend to exercise. The company leases various pieces of equipment such as forklifts, pallet jacks, and other items in support of
operations. These leases are cancelable and non-cancelable with terms ranging from one month to five years.
i
Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases. The purpose of the standard is to improve transparency and comparability related to the accounting and reporting of leasing arrangements. The new standard establishes a ROU model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months.
Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.
The effective date for the new standard, for the Company, was June 2, 2019 and the Company adopted the new standard on that date. The Company elected a modified retrospective transition approach, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either its effective date or the beginning of the earliest comparative period presented in the financial statements as its date of initial application. We used June
2, 2019 as the date of initial application. If an entity chooses the second option, the transition requirements for existing leases apply to leases entered into between the date of initial application and the effective date. The entity must recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. Because the Company chose the first option, the Company has not recast its comparative period financial statements. In connection with adopting the new standard, the Company reclassified its presentation of finance lease obligations and property in the financial statements for all periods presented.
The
new standard provides a number of optional practical expedients in transition. The Company elected practical expedients which permit us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs.
The new standard provides practical expedients for an entity’s initial and ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. For the leases that qualify, we do not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for all of our leases.
Implementation of the new standard did not
have a material effect on our financial statements. See Note 6 for additional information.
i
Reclassification
Certain reclassifications were made to the fiscal 2019 financial statements to conform to the fiscal 2020 financial statement presentation. These reclassifications had no effect on income
Effective on October 20, 2019, the Company acquired certain assets of Mahard Egg Farm (Mahard), relating to its commercial shell egg production, processing, distribution and sales for $i45.5
million. Upon satisfaction of certain post-closing covenants, an additional $i1 million dollars will be paid to the seller. The acquired assets include facilities with current capacity for approximately i3.9
million laying hens and permitted capacity for up to i8.0 million laying hens, a feed mill, pullet raising facilities and related production facilities located in Chillicothe, Texas, and Nebo, Oklahoma, and a distribution warehouse located in Gordonville, Texas. Mahard owned equity interests in the Company's majority owned subsidiary, Texas Egg Products, LLC (TEP). As a result of the acquisition, the
Company now owns i93.2% of TEP. The acquired operations of Mahard are included in the accompanying financial statements as of October 20, 2019. Acquisition related costs incurred during the period were immaterial to the financial statements.
Pending the finalization of the Company's valuation, tihe
following table summarizes the preliminary aggregate purchase price allocation for Mahard (in thousands):
Inventory
$
i5,276
Property,
plant and equipment
i38,433
Customer list and non-compete agreement
i2,000
Liabilities
assumed
(i194)
Purchase price
i45,515
Deferred
purchase price
(i1,000)
Cash consideration paid
$
i44,515
Note
3 - iInventories
i
Inventories consisted of the following (in thousands):
We
grow and maintain flocks of layers (mature female chickens), pullets (female chickens, under 18 weeks of age), and breeders (male and female chickens used to produce fertile eggs to hatch for egg production flocks). Our total flock at November 30, 2019 consisted of approximately i10.0 million pullets and breeders and i40.8
million layers.
Proceeds
from sales and maturities of investment securities available-for-sale were $i137.2 million and $i108.3
million during the twenty-six weeks ended November 30, 2019 and December 1, 2018, respectively. Gross realized gains for the twenty-six weeks ended November 30, 2019 and December 1, 2018 were $i162,000 and $i1,000,
respectively. Gross realized losses for the twenty-six weeks ended November 30, 2019 and December 1, 2018 were $i6,000 and $i26,000,
respectively. For purposes of determining gross realized gains and losses, the cost of securities sold is based on the specific identification method.
Actual maturities may differ from contractual maturities as some borrowers have the right to call or prepay obligations with or without penalties. iContractual maturities of current investments at November 30, 2019, are as follows (in
thousands):
The mutual funds are classified as “Other long-term assets” in the Company’s Condensed Consolidated Balance Sheets. Gains and losses are recognized in other income (expenses) as Other, net in the Company's Condensed Consolidated Statements of Operations.
Proceeds from sales and maturities of noncurrent investment securities were $i1.2
million and $i84,000 during the twenty-six weeks ended November 30, 2019 and December 1, 2018, respectively. Gross realized gains for the twenty-six weeks ended November 30, 2019 and December 1, 2018 were $i611,000
and $i48,000, respectively. There were iino/
realized losses for the twenty-six weeks ended November 30, 2019 and December 1, 2018. For purposes of determining gross realized gains and losses, the cost of securities sold is based on the specific identification method.
Note 5 - iFair Value Measurements
The
Company is required to categorize both financial and nonfinancial assets and liabilities based on the following fair value hierarchy. The fair value of an asset is the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable, and willing parties able to engage in the transaction. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor.
•Level 1 - Quoted prices in active markets for identical assets or liabilities
•Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly
•Level
3 - Unobservable inputs for the asset or liability that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
The disclosures of fair value of certain financial assets and liabilities that are recorded at cost are as follows:
Cash and cash equivalents: The carrying amount approximates fair value due to the short maturity of these instruments.
Long-term debt: The carrying value of the Company’s long-term debt is at its stated value. We have not elected to carry our long-term debt at fair value. Fair values for debt are based on quoted market prices or published forward
interest rate curves, which are level 2 inputs. iThe fair value and carrying value of the Company’s borrowings under its long-term debt were as follows (in thousands):
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
i
In accordance with the fair value hierarchy described above, the following table shows the fair value of financial assets and liabilities measured at fair value on a recurring basis as of November 30, 2019 and June 1, 2019 (in thousands):
Investment
securities – available-for-sale have maturities of three months or longer when purchased, and are classified as current, because they are available for current operations. Observable inputs for these securities are yields, credit risks, default rates, and volatility.
Expenses related to operating leases, amortization of finance lease ROU assets and finance lease interest are included in Cost of sales, Selling general and administrative expense, and Interest income, net in the Condensed Consolidated Statements of Operations. iThe Company’s lease cost consists of the
following (in thousands):
Note
7 - iAccrued Dividends Payable and Dividends per Common Share
We accrue dividends at the end of each quarter according to the Company’s dividend policy adopted by its Board of Directors. The Company pays a dividend to shareholders of its Common Stock and Class A Common Stock
on a quarterly basis for each quarter for which the Company reports net income attributable to Cal-Maine Foods, Inc. computed in accordance with GAAP in an amount equal to one-third (1/3) of such quarterly income. Dividends are paid to shareholders of record as of the i60th day following the last day of such quarter, except for the fourth fiscal quarter. For the fourth quarter, the Company pays dividends to
shareholders of record on the i65th day after the quarter end. Dividends are payable on the i15th day following the record date. Following a quarter for which the
Company does not report net income attributable to Cal-Maine Foods, Inc., the Company will not pay a dividend for a subsequent profitable quarter until the Company is profitable on a cumulative basis computed from the date of the last quarter for which a dividend was paid. At the end of the second quarter of fiscal 2020, the amount of cumulative losses to be recovered before payment of a dividend was $i75.6
million.
i
On our condensed consolidated statement of operations, we determine dividends per common share in accordance with the computation in the following table (in thousands, except per share data):
Net income (loss) attributable to Cal-Maine Foods, Inc. available for
dividend
$
(i10,061)
$
i21,807
$
(i55,821)
$
i34,212
1/3
of net income attributable to Cal-Maine Foods, Inc. available for dividend
$
i—
$
i7,246
$
i—
$
i11,381
Common
stock outstanding (shares)
i43,893
i43,828
Class
A common stock outstanding (shares)
i4,800
i4,800
Total
common stock outstanding (shares)
i48,693
i48,628
Dividends
per common share*
$
i—
$
i0.149
$
i—
$
i0.234
*Dividends
per common share = 1/3 of Net income (loss) attributable to Cal-Maine Foods, Inc. available for dividend ÷ Total common stock outstanding (shares).
The
following reflects the equity activity, including our noncontrolling interest, for the thirteen weeks ended November 30, 2019 and December 1, 2018 (in thousands):
The
following reflects the equity activity, including our noncontrolling interest, for the twenty-six weeks ended November 30, 2019 and December 1, 2018 (in thousands):
The vast majority of the Company’s revenue is derived from contracts with customers based on the customer placing an order for products. Pricing for the most part is determined when the
Company and the customer agree upon the specific order, which establishes the contract for that order.
Revenues are recognized in an amount that reflects the net consideration we expect to receive in exchange for the goods. Our shell eggs are sold at prices related to Urner Barry Spot Egg Market Quotations, negotiated prices or formulas related to our costs of production. The Company’s sales predominantly contain a single performance obligation. We recognize revenue
upon satisfaction of the performance obligation with the customer which typically occurs within days of the Company and the customer agreeing upon the order.
Returns and Refunds
Some of our contracts include a guaranteed sale clause, pursuant to which we credit the customer’s account for product that the customer is unable to sell before expiration. The Company records an estimate of returns and refunds by using historical return data and comparing to current period sales and accounts receivable. The allowance is recorded as a reduction in sales with a corresponding reduction in trade accounts receivable.
Disaggregation
of Revenue
i
The following table provides revenue disaggregated by product category (in thousands):
The Company can incur costs to obtain or fulfill a contract with a customer. The amortization period of these costs is less than one year; therefore, they are expensed as incurred.
The Company receives payment from customers based on specified terms that are generally less than 30 days from delivery. There are rarely contract assets or liabilities related to performance under the contract.
Note
10 - iStock Based Compensation
Total stock based compensation expense was for $ii1.8/
million both of the twenty-six weeks ended November 30, 2019 and December 1, 2018.
Unrecognized compensation expense as a result of non-vested shares of the 2012 Omnibus Long-Term Incentive Plan at November 30, 2019 of $i4.2
million will be recorded over a weighted average period of i1.8 years. Refer to Note 10 of our June 1, 2019 audited financial statements for further information on our stock compensation plans.
Basic net loss per share was calculated by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share was calculated by dividing net income by the weighted-average number of common shares outstanding during the period plus the dilutive effects of options and restricted stock. Due to the net loss in the thirteen weeks ended and twenty-six weeks ended November
30, 2019, restricted shares were excluded from the calculation of diluted net loss per share because their inclusion would have been antidilutive. iThe computations of basic and diluted net loss per share attributable to the Company are as follows (in thousands, except per share data):
Net income (loss) attributable to Cal-Maine Foods, Inc.
$
(i10,061)
$
i21,807
$
(i55,821)
$
i34,212
Basic
weighted-average common shares
i48,447
i48,391
i48,447
i48,390
Effect
of dilutive securities:
Restricted shares
i—
i143
i—
i135
Dilutive
potential common shares
i48,447
i48,534
i48,447
i48,525
Antidilutive
securities excluded from computation of earnings per share
i135
i—
i123
i—
Net
income (loss) per common share attributable to Cal-Maine Foods, Inc.:
Basic
$
(i0.21)
$
i0.45
$
(i1.15)
$
i0.71
Diluted
$
(i0.21)
$
i0.45
$
(i1.15)
$
i0.71
Note
12 - iCommitment and Contingencies
Financial Instruments
The Company maintained standby letters of credit (LOC) totaling $i4.2
millionat November 30, 2019 that were issued under our Revolving Credit Facility. The outstanding LOCs are for the benefit of certain insurance companies, and are not recorded as a liability on the consolidated balance sheets.
Egg Antitrust Litigation
On September 25, 2008, the Company was named as one of several defendants in numerous antitrust cases involving the United States shell egg industry. The cases were consolidated into In re: Processed Egg Products Antitrust Litigation, No. 2:08-md-02002-GP, in the United States District Court for the Eastern District of
Pennsylvania
(the “District Court”), in three groups of cases - the “Direct Purchaser Putative Class Action”, the “Indirect Purchaser Putative Class Action” and the “Non-Class Cases.” As previously reported, the Company settled all of the Direct Purchaser Putative Class Action cases and the Indirect Purchaser Putative Class Action cases, and all Non-Class cases except for the claims of certain plaintiffs who sought substantial damages allegedly arising from the purchase of egg products (as opposed to shell eggs). In addition, as previously reported, the Company settled all claims brought by one of these plaintiffs, Conopco, Inc., and the Court entered a final judgment dismissing Conopco’s claims against the Company
on November 21, 2018. On October 24, 2019, the Company entered into a confidential settlement agreement with The Kellogg Company dismissing all claims against the Company for an amount that does not have a material impact on the Company’s financial condition or results of operations. On November 11, 2019, a stipulation for dismissal was filed with the court, but the court has not yet entered a judgment on the filing. The remaining plaintiffs are Kraft Food Global, Inc., General Mills, Inc., and Nestle USA, Inc. (“Egg Products Plaintiffs”). The Egg Products Plaintiffs
seek treble damages and injunctive relief under the Sherman Act and are attacking certain features of the UEP animal-welfare guidelines and program used by the Company and many other egg producers. On July 2, 2019 the Egg Products Plaintiffs filed a motion to remand, and on September 13, 2019 the case was remanded to the United States District Court for the Northern District of Illinois, Kraft Foods Global, Inc. et al v. United Egg Producers, Inc. et al, No. 1:11-cv-08808 (DP), where it was initially filed, for trial. The Illinois court has not issued a case management order or any other directive.
The Company intends to continue
to defend the remaining case as vigorously as possible based on defenses which the Company believes are meritorious and provable. While management believes that the likelihood of a material adverse outcome in the overall egg antitrust litigation has been significantly reduced as a result of the settlements and rulings described above, there is still a reasonable possibility of a material adverse outcome in the remaining egg antitrust litigation. At the present time, however, it is not possible to estimate the amount of monetary exposure, if any, to the Company because of this remaining case. Adjustments, if any, which might result from the resolution of these remaining legal matters, have not been reflected in the financial statements.
Other
Matters
In addition to the above, the Company is involved in various other claims and litigation incidental to its business. Although the outcome of these matters cannot be determined with certainty, management, upon the advice of counsel, is of the opinion that the final outcome should not have a material effect on the Company’s consolidated results of operations or financial position.
ITEM 2. MANAGEMENT’SDISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains numerous forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) relating to our shell egg business, including estimated future production data, expected construction schedules, projected construction costs, potential future supply of and demand for our products, potential future corn and soybean price trends, potential future impact on our business of new legislation, rules or policies, potential outcomes of legal proceedings, and other projected operating data, including anticipated results of operations and financial condition. Such
forward-looking statements are identified by the use of words such as “believes,”“intends,”“expects,”“hopes,”“may,”“should,”“plans,”“projected,”“contemplates,”“anticipates,” or similar words. Actual outcomes or results could differ materially from those projected in the forward-looking statements. The forward-looking statements are based on management’s current intent, belief, expectations, estimates, and projections regarding the Company and its industry. These statements are not guarantees of future performance and involve risks, uncertainties, assumptions, and other factors that are difficult to predict and may be beyond our control. The factors that could cause actual results to differ materially from those projected in the forward-looking statements include, among others, (i) the risk factors set forth
in Item 1A of our Annual Report on Form 10-K for fiscal year 2019, as updated by our subsequent Quarterly Reports on Form 10-Q, (ii) the risks and hazards inherent in the shell egg business (including disease, pests, weather conditions, and potential for product recall), (iii) changes in the demand for and market prices of shell eggs and feed costs, (iv) our ability to predict and meet demand for cage-free and other specialty eggs, (v) risks, changes, or obligations that could result from our future acquisition of new flocks or businesses and risks or changes that may cause conditions to completing a pending acquisition not to be met, and (vi) adverse results in pending litigation matters. Readers are cautioned not to place undue reliance on forward-looking statements because, while we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate. Further,
forward-looking statements included herein are only made as of the respective dates thereof, or if no date is stated, as of the date hereof. Except as otherwise required by law, we disclaim any intent or obligation to update publicly these forward-looking statements, whether because of new information, future events, or otherwise.
OVERVIEW
Cal-Maine Foods, Inc. (the “Company,”“we,”“us,”“our”) is primarily engaged in the production, grading, packaging, marketing, and distribution of fresh shell eggs. Our fiscal year end is the Saturday closest to May 31.
Our operations are fully integrated. At our facilities we hatch chicks, grow and maintain flocks of pullets (young female chickens,
under 18 weeks of age), layers (mature female chickens) and breeders (male and female birds used to produce fertile eggs to hatch for egg production flocks), manufacture feed, and produce, process, and distribute shell eggs. We are the largest producer and marketer of shell eggs in the United States (“U.S.”). We market the majority of our shell eggs in the southwestern, southeastern, mid-western, and mid-Atlantic regions of the U.S. We market shell eggs through an extensive distribution network to a diverse group of customers, including national and regional grocery store chains, club stores, foodservice distributors, and egg product consumers.
The Company has one operating segment, which is the production, grading, packaging, marketing and distribution of shell eggs. The majority of our customers
rely on us to provide most of their shell egg needs, including specialty and non-specialty eggs. Specialty eggs represent a broad range of products. We classify nutritionally enhanced, cage free, organic and brown eggs as specialty products for accounting and reporting purposes. We classify all other shell eggs as non-specialty products. While we report separate sales information for these types of eggs, there are a number of cost factors which are not specifically available for non-specialty or specialty eggs due to the nature of egg production. We manage our operations and allocate resources to these types of eggs on a consolidated basis based on the demands of our customers.
Our
operating results are directly tied to egg prices, which are highly volatile and subject to wide fluctuations, and are outside of our control. For example, the Urner-Barry Southeastern Regional Large Egg Market Price per dozen eggs (“UB southeastern large index”) for our fiscal years 2016-2019 ranged from a low of $0.58 in fiscal year 2016 to a high of $3.00 in fiscal year 2018. The shell egg industry has traditionally been subject to periods of high profitability followed by periods of significant loss. In the past, during periods of high profitability, shell egg producers tended to increase the number of layers in production with a resulting increase in the supply of shell eggs, which generally caused a drop in shell egg prices until supply and demand returned to balance. As a result, our financial results from year to year may vary significantly. Shorter term, retail sales of shell eggs historically have been greatest during the fall and winter months and
lowest during the summer months. Prices for shell eggs fluctuate in response to seasonal factors and a natural increase in shell egg production in the spring and early summer. Historically, shell egg prices have increased with the start of the school year and are highest prior to holiday periods, particularly Thanksgiving, Christmas, and Easter. Consequently, we generally experience lower sales and net income in our first and fourth fiscal quarters. Because of the seasonal and quarterly fluctuations, comparisons of our sales and operating results between different quarters within a single fiscal year are not necessarily meaningful comparisons.
For the second quarter, the average UB southeastern large index price was down 12.7% compared with the prior-year period. At the same time our net average selling price for all shell eggs for the thirteen weeks ended November
30, 2019 was down 11.5% to $1.160 compared with $1.311 for the corresponding period of fiscal 2019. According to market research firm IRI as of December 15, 2019, non-specialty egg dozens are up 2.9% while specialty egg dozens are down 2.5% through the calendar year. An oversupply of eggs has negatively affected the price of non-specialty eggs and demand for specialty eggs was negatively impacted by the low non-specialty egg prices. Hen numbers as reported by the USDA Chickens and Eggs report as of December 23, 2019 are 340.5 million, which is 4.6 more million hens than a year ago, and continues to contribute to an oversupply of eggs. These hen numbers continue to trend upwards, which could continue to negatively affect average market prices for future periods.
We are one of the largest producers
and marketers of value-added specialty shell eggs in the U.S. Specialty shell eggs have been a significant and growing portion of the market. In recent years, a significant number of large restaurant chains, food service companies and grocery chains, including our largest customers, announced goals to transition to a cage-free egg supply chain by specified future dates. We are working with our customers to achieve smooth progress in meeting their goals.
Additionally, several states have now passed or proposed minimum space and/or cage-free requirements. Specifically, California passed Proposition 12 in November 2018, which provides for minimum space requirements per hen beginning in 2020 and mandates all eggs or egg products sold in California must be cage-free by 2022. Subsequently, Washington and Oregon have passed laws requiring cage-free hen housing by 2024, and Massachusetts,
Rhode Island and Michigan have similar laws defining space requirements or other restrictions on cages. While our direct sales into these states have not been material, these laws will affect sourcing, production and pricing of eggs (conventional as well as specialty) not only within these states, but also in other areas of the country.
Our growth strategy is focused on remaining a low-cost provider of shell eggs located near our customers. In light of the increased demand for cage-free eggs, we intend to continue to closely evaluate the need to expand through selective acquisitions that will expand our shell egg production capabilities in key locations and markets, as well as focused expansion and conversion of our existing farms, based on a timeline to meet our customers’ needs.
On March
29, 2019, our Board of Directors approved a major expansion of the cage-free capacity at the Company’s Delta, Utah facility. This expansion includes new facilities for 2.0 million cage-free hens, pullets and a processing plant, as well as renovation of existing capacity for cage-free hens. Final completion of these additions and renovations is expected by early 2022 and will add approximately 3.4 million cage-free hens.
We continue to invest in cage-free production with our approved expansion projects across our portfolio. See the table under “Capital Resources and Liquidity” later in this section for further information on projects in-progress.
For
the thirteen weeks ended and November 30, 2019 and December 1, 2018, we produced approximately 89% and 85% of the total number of shell eggs we sold, respectively. For the thirteen weeks ended November 30, 2019 and December 1, 2018, approximately 9% of such production was provided by contract producers who utilize their facilities in the production of shell eggs by layers owned by us. We own the shell eggs produced under these arrangements.
Our cost of production is materially affected by feed costs. Feed costs averaged 56.1% and 57.3% of our total farm egg production cost for the thirteen weeks
ended November 30, 2019 and December 1, 2018, respectively. Changes in market prices for corn and soybean meal, the primary ingredients in the feed we use, result in changes in our cost of goods sold. The cost of feed ingredients, which are commodities, are subject to factors over which we have little or no control such as volatile price changes caused by weather, size of harvest, transportation, storage costs, demand, and the agricultural and energy policies of the U.S. and foreign governments. Based on the USDA’s current yield and harvest estimates for corn and soybean crops, we expect to have an adequate supply of both grains in fiscal 2020. However, ongoing uncertainties and geopolitical issues surrounding trade agreements and international tariffs could create more price volatility in the coming year.
RESULTS
OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from our Condensed Consolidated Statements of Operations expressed as a percentage of net sales.
Income
(loss) before income taxes and noncontrolling interest
(4.9)
%
8.1
%
(13.7)
%
6.5
%
Income tax (benefit) expense
(1.6)
%
1.9
%
(3.6)
%
1.5
%
Net
income (loss) before noncontrolling interest
(3.3)
%
6.2
%
(10.1)
%
5.0
%
Less: Income (loss) attributable to noncontrolling interest
—
%
0.1
%
—
%
0.1
%
Net
income (loss) attributable to Cal-Maine Foods, Inc.
(3.3)
%
6.1
%
(10.1)
%
4.9
%
NET SALES
Net sales for the thirteen weeks ended November 30, 2019 were $311.5 million, a decrease of $44.5 million, or 12.5%, compared to net sales of $356.0 million
for the thirteen weeks ended December 1, 2018. The decrease was primarily due to an 11.5% decrease in egg selling prices.
Net shell egg sales of $303.7 million and $345.0 million made up approximately 97.5% and 96.9% of net sales for the thirteen weeks ended November 30, 2019 and December 1, 2018, respectively. Dozens sold for the thirteen weeks ended November 30, 2019 were 261.0 million, a 0.5% decrease from 262.3 million dozen for the same period of fiscal 2019. The total volume decrease for the thirteen weeks ended November 30, 2019 accounted for a $1.4 million decrease in net sales.
During
the second quarter of fiscal 2020, we lost a portion of our sales of non-specialty eggs to a major customer in the Southeast region, representing 4.6 percent of total shell egg dozens and 6.1 percent of non-specialty egg dozens for fiscal 2019. This did not materially affect sales during the second quarter of fiscal 2020. However, we expect our new capacity additions and our previously disclosed plans to decommission some older, less efficient facilities will help optimize our operations, improve our sales mix, and better align our production and sales within the region.
We expect our recent acquisition of Mahard effective October 20, 2019 will have a positive impact on our non-specialty shell egg volumes and continue growth of our customer base. Furthermore, the acquisition has opened up opportunities for streamlining aspects of our
operations which will reduce costs and create efficiencies as we integrate Mahard into our operations.
The net average selling price per dozen of shell eggs was $1.160 for the thirteen weeks ended November 30, 2019, compared to $1.311 for the thirteen weeks ended December 1, 2018. The 11.5% decrease in average selling price accounted for a $39.6 million decrease in net sales.
Egg products accounted for 2.5% and 3.1% of net sales for the thirteen weeks ended November 30, 2019 and December 1, 2018, respectively. These revenues were $7.8 million for the thirteen
weeks ended November 30, 2019, compared to $11.1 million for the thirteen weeks ended December 1, 2018, primarily due to lower prices.
Net sales for the twenty-six weeks ended November 30, 2019 were $552.7 million, a decrease of $143.9 million, or 20.7%, compared to net sales of $696.6 million for the twenty-six weeks ended December 1, 2018. The decrease was primarily due to a 20.6% decrease in egg selling prices.
Net shell egg sales of $537.7 million and $673.5 million made up approximately 97.3% and 96.7% of net sales for the twenty-six weeks ended November
30, 2019 and December 1, 2018, respectively. Dozens sold for the twenty-six weeks ended November 30, 2019 were 515.5 million, a 0.6% increase from 512.3 million dozen for the same period of fiscal 2019. The volume increase accounted for a $3.2 million increase in net sales.
The net average selling price per dozen of shell eggs was $1.039 for the twenty-six weeks ended November 30, 2019, compared to $1.309 for the twenty-six weeks ended December 1, 2018. The 20.6% decrease in average selling price accounted for a $138.3 million decrease in net sales.
Egg products accounted for 2.7% and 3.3% of
net sales for the twenty-six weeks ended November 30, 2019 and December 1, 2018, respectively. These revenues were $15.0 million for the twenty-six weeks ended November 30, 2019, compared to $23.1 million for the twenty-six weeks ended December 1, 2018, primarily due to lower prices.
The
table below represents an analysis of our non-specialty and specialty shell egg sales (in thousands, except percentage data). Following the table is a discussion of the information presented in the table.
Net
shell egg sales as a percent of total net sales
97.5
%
96.9
%
97.3
%
96.7
%
Dozens
sold:
Non-specialty
199,566
76.5
%
197,163
75.2
%
394,481
76.5
%
384,562
75.1
%
Specialty
58,216
22.3
%
61,717
23.5
%
114,627
22.2
%
121,131
23.6
%
Co-pack
specialty
3,244
1.2
%
3,383
1.3
%
6,342
1.3
%
6,630
1.3
%
Total
dozens sold
261,026
100.0
%
262,263
100.0
%
515,450
100.0
%
512,323
100.0
%
Net
average selling price per dozen:
Non-specialty
$
0.937
$
1.097
$
0.782
$
1.104
Specialty
$
1.878
$
1.958
$
1.871
$
1.924
All shell eggs
$
1.160
$
1.311
$
1.039
$
1.309
Non-specialty
shell eggs include all shell egg sales not specifically identified as specialty or co-pack specialty shell egg sales. This market is characterized generally by an inelasticity of demand. Small increases or decreases in production or demand can have a large positive or adverse effect on selling prices. Comparing thirteen weeks ended November 30, 2019 and December 1, 2018, non-specialty egg dozens sold increased 1.2% and the average selling price decreased 14.6% to $0.937 from $1.097. Comparing the twenty-six weeks ended November 30, 2019 and December 1, 2018, non-specialty shell egg dozens sold increased 2.6% and the the average selling price decreased 29.2% to $0.782 from $1.104.
Specialty
shell eggs, which include nutritionally enhanced, cage-free, organic, and brown eggs continue to make up a large portion of our total shell egg revenue and dozens sold. Specialty egg retail prices are less cyclical than non-specialty shell egg prices and are generally higher due to consumer willingness to pay for the perceived benefits from these products. For the thirteen weeks ended November 30, 2019 and December 1, 2018, specialty shell egg dozens sold decreased 5.7%, and the average selling price decreased 4.1% to $1.878 from $1.958. Specialty egg volumes were affected by the significant price differential between non-specialty and specialty eggs. For the twenty-six weeks ended November 30, 2019, specialty shell egg dozens sold decreased 5.4% and the average selling price decreased 2.8% to $1.871 from $1.924 compared
to the same period of fiscal 2019.
Co-pack specialty shell eggs are sold primarily through co-pack arrangements, a common practice in the industry whereby production and processing of certain products is outsourced to another producer. Co-pack specialty shell eggs sold during the thirteen weeks ended November 30, 2019 and December 1, 2018 were 3.2 million and 3.4
million dozen, respectively, which represented 1.2% and 1.3% of total dozens sold for those periods. Co-pack specialty
shell eggs sold during the twenty-six weeks ended November 30, 2019 and December 1, 2018 were 6.3 million and 6.6 million dozen, respectively, which represented 1.3% and 1.3% of total dozens sold for those periods.
The shell egg sales classified as “Other” represent sales of hard cooked eggs, hatching eggs, and other miscellaneous products, which are included with our shell egg operations.
Egg products are shell eggs that are broken and sold in liquid, frozen, or dried form. Our egg products are sold through our wholly-owned subsidiary American Egg Products, LLC (“AEP”) and our majority owned subsidiary Texas Egg Products, LLC (“TEP”).
For
the second quarter of fiscal 2020, egg product sales were $7.8 million, a decrease of $3.3 million, or 29.6%, compared to $11.1 million for the same period of fiscal 2019. Pounds sold for the thirteen weeks ended November 30, 2019 were 16.2 million, an increase of 1.2 million, or 7.8%, compared to the same period of fiscal 2019. The selling price per pound for the thirteen weeks ended November 30, 2019 was $0.480 compared to $0.740 for the same period of fiscal 2019, a decrease of $0.260 or 35.1%.
For the twenty-six weeks ended November 30, 2019, egg product sales were $15.0 million, a decrease of $8.1 million, or 35.2%, compared to $23.1 million for the same period of fiscal 2019. Pounds sold for the twenty-six weeks ended November
30, 2019 were 33.6 million, an increase of 3.0 million, or 9.9%, compared to the same period of fiscal 2019. The selling price per pound for the twenty-six weeks ended November 30, 2019 was $0.447 compared to $0.761 for the same period of fiscal 2019, a decrease of $0.314 or 41.3%.
Cost of sales consists of costs directly related to production, processing and packing of shell
eggs, purchases of shell eggs from outside producers, processing and packing of liquid and frozen egg products, and other non-egg costs. Farm production costs are those costs incurred at the egg production facility, including feed, facility, hen amortization, and other related farm production costs.
The following table presents the key variables affecting cost of sales (in thousands, except cost per dozen data).
Egg purchases and other (including change in inventory)
48,055
61,581
(22.0)
%
90,575
130,801
(30.8)
%
Total
shell eggs
274,680
277,203
(0.9)
%
528,702
551,916
(4.2)
%
Egg products
7,467
8,140
(8.3)
%
12,817
16,438
(22.0)
%
Other
—
162
(100.0)
%
2,919
606
381.7
%
Total
$
282,147
$
285,505
(1.2)
%
$
544,438
$
568,960
(4.3)
%
Farm
production cost (per dozen produced)
Feed
$
0.416
$
0.415
0.2
%
$
0.413
$
0.414
(0.2)
%
Other
$
0.325
$
0.309
5.2
%
$
0.332
$
0.313
6.1
%
Total
$
0.741
$
0.724
2.3
%
$
0.745
$
0.727
2.5
%
Outside
egg purchases (average cost per dozen)
$
1.28
$
1.30
(1.5)
%
$
1.06
$
1.32
(19.7)
%
Dozen
produced
231,467
222,955
3.8
%
445,765
432,168
3.1
%
Dozen sold
261,026
262,263
(0.5)
%
515,450
512,323
0.6
%
Cost
of sales for the second quarter of fiscal 2020 was $282.1 million, a decrease of $3.4 million, or 1.2%, from $285.5 million for the same period of fiscal 2019. This decrease was primarily driven by the decrease in the volume of outside egg purchases as well as a slight decrease in the cost of these purchases. Farm production costs for the thirteen weeks ended November 30, 2019 was $169.7 million, compared to $160.2 million for the comparable period of fiscal 2019, an increase of $9.5 million, which is primarily due to an increase in production volume and in production costs other than feed costs. Dozens produced increased by 3.8% compared to the same period of fiscal 2019. Feed cost per dozen for the thirteen weeks ended November 30, 2019, was $0.416, compared to $0.415 per dozen for the comparable period of fiscal 2019,
an increase of 0.2%. Other farm production cost per dozen produced increased 5.2% to $0.325 for the thirteen weeks ended November 30, 2019, compared to $0.309 for the same period of last year. The majority of the increase was accelerated amortization expense associated with selling flocks early due to market conditions, and higher labor costs.
Cost of sales for the twenty-six weeks ended November 30, 2019 was $544.4 million, a decrease of $24.5 million, or 4.3%, from $569.0 million for the same period of
fiscal 2019. This decrease was primarily driven by the decrease in both volume and cost of outside egg purchases. Farm production costs for the twenty-six weeks ended November 30, 2019 was $327.3 million, compared to $311.1 million for the comparable period of fiscal 2019, an increase of $16.3 million, which is primarily due to increased production volume and in production costs other than feed costs. Dozens produced increased by 3.1% compared to the same period of fiscal 2019. Feed cost per dozen for the twenty-six weeks ended November 30, 2019, was $0.413, compared to $0.414 per dozen for the comparable period of fiscal 2019, a decrease of 0.2%. Other farm production cost per dozen produced increased 6.1% to $0.332 for the twenty-six weeks ended November 30, 2019, compared
to $0.313 for the same period of last year. The majority of the increase was accelerated amortization expense associated with selling flocks early due to market conditions, and higher labor costs.
Included in cost of sales for the twenty-six weeks ended November 30, 2019 is a non-cash impairment loss on fixed assets of $2.9 million related to decommissioning some of our older, less efficient production facilities as we continue to invest in new facilities to meet the increasing demand for specialty eggs and reduce production costs.
Gross profit for the second quarter of fiscal 2020 was $29.4 million compared to $70.5 million for the same period of fiscal 2019. For the twenty-six weeks ended November 30, 2019,
gross profit decreased to $8.3 million gross profit from $127.7 million for the same period of fiscal 2019. This decrease for both periods, was primarily due to the significant drop in market prices, which we believe reflects the current unfavorable supply and demand balance.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses include costs of marketing, distribution, accounting, and corporate overhead. The following table presents an analysis of our selling, general, and administrative expenses (in thousands).
For
the thirteen weeks ended November 30, 2019, selling, general, and administrative expense was $45.7 million compared to $45.2 million for the thirteen weeks ended December 1, 2018. Specialty egg expense decreased $1.6 million, or 11.9%, compared to the same period of the prior year. Specialty egg expense typically fluctuates with specialty egg dozens sold, which decreased 5.7% for the thirteen weeks ended November 30, 2019.
Payroll, taxes and benefits increased $886 thousand, or 9.5%, compared to the same period of the prior year, primarily due to improved performance of the index fund utilized for the deferred compensation plan, as the participants are credited with investment earnings of the fund. This increased expense is offset
by the unrealized gain on the investment in the fund recorded in other income. Increased employee medical insurance expense also contributed to the increase.
Other expenses increased $1.1 million or 13.8% compared to same period in fiscal 2019. This increase is primarily due to an increase in non-legal professional fees.
For
the twenty-six weeks ended November 30, 2019, selling, general, and administrative expense was $88.2 million compared to $89.7 million for the twenty-six weeks ended December 1, 2018. Specialty egg expense decreased $3.3 million, or 12.5%, compared to the same period of the prior year. Specialty egg expense typically fluctuates with specialty egg dozens sold, which decreased 5.4% for the twenty-six weeks ended November 30, 2019. Advertising expense, which is a component of specialty egg expense, also contributed to the decrease in specialty egg expense for the twenty-six weeks ended November 30, 2019.
Payroll and overhead expense decreased $269 thousand, or 1.3%, compared to the same period of the
prior year, primarily due to a decrease in bonus accruals. Other expenses increased $2.7 million or 20.0% compared to same period in fiscal 2019. This increase is primarily due to increased insurance premiums and an increase in non-legal professional fees.
OPERATING INCOME (LOSS)
For the thirteen weeks ended November 30, 2019, we recorded an operating loss of $16.6 million compared to operating income of $25.3 million for the same period of fiscal 2019.
For the twenty-six weeks ended November 30, 2019, we recorded an operating loss of $80.0 million compared to operating income of $38.0 million for the same period of fiscal 2019.
OTHER
INCOME (EXPENSE)
Total other income (expense) consists of items not directly charged to, or related to, operations such as interest income and expense, royalty income, equity in income or loss of affiliates, and patronage income, among other items.
For the thirteen weeks ended November 30, 2019, we earned $1.2 million of interest income compared to $1.8 million for the same period of fiscal 2019. The decrease resulted from by significantly lower investment balances, partially offset by higher interest rates. The Company recorded interest expense of $91 thousand and $130 thousand for the thirteen weeks ended November 30,
2019 and December 1, 2018, respectively.
For the twenty-six weeks ended November 30, 2019, we earned $3.0 million of interest income compared to $3.7 million for the same period of fiscal 2019. The decrease resulted from by significantly lower investment balances, partially offset by higher interest rates. The Company recorded interest expense of $181 thousand and $243 thousand for the twenty-six weeks ended November 30, 2019 and December 1, 2018, respectively.
Equity
in income (loss) of affiliates for the thirteen weeks ended November 30, 2019 was a loss of $454 thousand compared to income of $909 thousand for the same period of fiscal 2019. The decrease of $1.4 million is primarily due to the decrease in egg selling prices.
Equity in income (loss) of affiliates for the twenty-six weeks ended November 30, 2019 was a loss of $908 thousand compared to income of $2.3 million for the same period of fiscal 2019. The decrease of $3.2 million is primarily due to the decrease in egg selling prices.
Other, net for the thirteen weeks ended November 30, 2019, was income of $482 thousand compared to $124 thousand for the same period of fiscal
2019, primarily driven by realized and unrealized gains in equity securities.
Other, net for the twenty-six weeks ended November 30, 2019, was income of $1.8 million compared to $225 thousand for the same period of fiscal 2019, primarily driven by realized and unrealized gains in equity securities.
INCOME TAXES
For the thirteen weeks ended November 30, 2019, pre-tax loss was $15.0 million compared to $28.8 million pre-tax income for the same period of fiscal 2019. For thirteen weeks ended November 30, 2019, income tax benefit of $4.9 million was recorded which included a
$1.5 million state income tax benefit recorded for a claim of refund, with an effective tax rate of 32.3%, compared to income tax expense of $6.8 million for the comparable period of fiscal 2019, which reflects an effective tax rate of 23.5%.
For the twenty-six weeks ended November 30, 2019, pre-tax loss was $75.5 million compared to $45.3 million pre-tax income for the same period of fiscal 2019. For twenty-six weeks ended November 30, 2019, income tax benefit of $19.6 million was recorded, with an effective tax rate of 26.0%, compared to income tax expense of $10.5 million for the comparable period of fiscal 2019, which reflects an effective tax rate of 23.2%.
At November
30, 2019, trade and other receivables included income taxes receivables of $11.2 million compared to $9.7 million at June 1, 2019.
Our effective rate differs from the federal statutory income tax rate due to state income taxes and certain items included in income for financial reporting purposes that are not included in taxable income for income tax purposes, including tax exempt interest income and net income or loss attributable to noncontrolling interest. Results for the thirteen weeks ended November 30, 2019 were favorably impacted by a $1.5 million state income tax benefit recorded for a claim of refund filed during the period.
NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST
For
the thirteen weeks ended November 30, 2019, net loss attributable to noncontrolling interest was $125 thousand compared to $199 thousand net income for the same period of fiscal 2019.
For the twenty-six weeks ended November 30, 2019, net loss attributable to noncontrolling interest was $86 thousand compared to $537 thousand net income for the same period of fiscal 2019.
NET INCOME (LOSS) ATTRIBUTABLE TO CAL-MAINE FOODS, INC.
Net loss for the thirteen weeks ended November 30, 2019 was $10.1 million, or $0.21 per basic and diluted share, compared to net income of $21.8 million,
or $0.45 per basic and diluted share for the same period of last fiscal year.
Net loss for the twenty-six weeks ended November 30, 2019 was $55.8 million, or $1.15 per basic and diluted share, compared to net income of $34.2 million, or $0.71 per basic and diluted share for the same period of last fiscal year.
Our
working capital at November 30, 2019 was $346.0 million, compared to $492.8 million at June 1, 2019. The calculation of working capital is defined as current assets less current liabilities. Our current ratio was 4.36 at November 30, 2019, compared with 7.58 at June 1, 2019.
During the second quarter of fiscal 2020, we retired all outstanding long-term debt. As such there is no long-term debt at November 30, 2019, including current maturities, compared to $1.3 million at June 1, 2019. On July 10, 2018, we entered into a $100.0 million Senior
Secured Revolving Credit Facility (“the Revolving Credit Facility”). As of November 30, 2019, no amounts were borrowed under the Revolving Credit Facility. We have $4.2 million in outstanding standby letters of credit, which were issued under our Revolving Credit Facility for the benefit of certain insurance companies. Refer to Note 8 of our June 1, 2019 audited financial statements for further information regarding our long-term debt.
For the twenty-six weeks ended November 30, 2019, $74.3 million in net cash was used in operating activities, compared to $27.7 million provided by operating activities for the comparable period in fiscal 2019. A decrease in egg selling prices which resulted in a net loss contributed to
our decrease in cash flow from operations. Other adjustments, net decreased primarily due to increases in accounts receivables and inventories.
For the twenty-six weeks ended November 30, 2019, $137.2 million was provided from the sale and maturity of investment securities compared to $108.3 million for the twenty-six weeks ended December 1, 2018. We used $10.1 million and $78.6 million for purchases of investment securities for the twenty-six weeks ended November 30, 2019 and December 1, 2018, respectively.
We did not invest additional resources in our unconsolidated entities during the twenty-six
weeks ended November 30, 2019 compared to $4.3 million for the same period fiscal 2019. We continue to invest in our facilities as $68.1 million was used to purchase property, plant and equipment compared to $19.0 million in the twenty-six weeks ended December 1, 2018. We used $44.5 million for the previously disclosed acquisition of Mahard in the second quarter of fiscal 2020 and $17.9 million for the acquisition of Featherland Egg Farm, Inc. in the second quarter of fiscal 2019. We received $2.4 million in distributions from unconsolidated entities during the twenty-six weeks ended November 30, 2019 compared to $4.5 million for the same period fiscal 2019. We used $1.6 million for principal payments on long-term debt and finance leases compared to $2.2 million for the same period of fiscal 2019. We did not pay any
dividends during twenty-six weeks ended November 30, 2019 compared to $21.2 million for the same period of last fiscal year.
As of November 30, 2019, cash has decreased $58.0 million since June 1, 2019 compared to a decrease of $2.2 million during the same period of fiscal 2019.
The Revolving Credit Facility is guaranteed by all the current and future wholly-owned direct and indirect domestic subsidiaries of the Company, and is secured by a first-priority perfected security interest in
substantially all of the Company’s and the guarantors’ accounts receivable, payment intangibles, instruments (including promissory notes), chattel paper, inventory (including farm products) and deposit accounts maintained with the administrative agent. The credit agreement governing our Revolving Credit Facility contains customary covenants including restrictions on the incurrence of liens, incurrence of additional debt, sales of assets and other fundamental corporate changes and investments. The credit agreement requires maintenance of two financial covenants (i) a minimum working capital ratio of 2.0 to 1.0 and (ii) an annual limit on capital expenditures of $100.0 million. Additionally, the credit agreement requires that Fred R. Adams Jr., his spouse, natural children, sons-in-law or grandchildren, or any trust, guardianship, conservatorship or custodianship for the primary benefit
of any of the foregoing, or any family limited partnership, similar limited liability company or other entity that 100% of the voting control of such entity is held by any of the foregoing, shall maintain at least 50% of the outstanding voting power of the Company. Failure to satisfy any of these covenants will constitute a default under the terms of the credit agreement. In addition, under the terms of the credit agreement, dividends are restricted to the Company’s current dividend policy of one-third of the
Company’s
net income computed in accordance with GAAP. The Company is allowed to repurchase up to $75.0 million of its capital stock in any year provided there is no default under the credit agreement and the borrower has availability of at least $20.0 million under the Revolving Credit Facility.
We continue to monitor the increasing demand for cage-free, organic and other specialty eggs in order to meet our customer's needs. We have invested over $314 million in facilities, equipment and related operations to expand our cage-free production. The following table represents current material construction projects approved as of November 30, 2019 (in thousands):
We
believe our current cash balances, investments, cash flows from operations, and Revolving Credit Facility will be sufficient to fund our current and projected capital needs for at least the next twelve months.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which modifies the measurement of expected credit losses of certain financial instruments and changes the loss impairment methodology. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2019, our fiscal 2021. Early adoption is permitted for annual reporting periods
and interim periods within those annual reporting periods beginning after December 15, 2018, our fiscal 2020. The application of the guidance requires various transition methods depending on the specific amendment. We do not expect the adoption of this guidance will have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes step 2 from the goodwill impairment test. As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units’ fair value. The guidance is effective for annual or interim
goodwill impairment tests in fiscal years beginning after December 15, 2019, our fiscal 2021. Early adoption is permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017, and the prospective transition method should be applied. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in
a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This standard will be effective for interim and annual reporting periods beginning after December 15, 2019, our fiscal 2021. Early adoption is permitted. The application of the guidance requires various transition methods depending on the specific amendment and the prospective transition method should be applied. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20) Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans. The guidance removes disclosures that are no longer considered cost beneficial and adds new, as well as clarifies certain other, disclosure requirements. This standard will be effective in fiscal years after December 15, 2020, our fiscal 2021, with the option to early adopt at any time prior to the effective date, and it will require adoption on a retrospective basis. We are currently evaluating the impact of this standard on the consolidated financial statements.
CRITICAL
ACCOUNTING POLICIES
We suggest our Summary of Significant Accounting Policies, as described in Note 1 of the Notes to Consolidated Financial Statements included our Annual Report on Form 10-K for the fiscal year ended June 1, 2019 (“2019 Annual Report”), and as described in Note 1 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in such 2019 Annual Report and this Quarterly Report. Except for the adoption of ASU 2016-02, Leases, there have been no changes to our significant accounting policies described in our 2019 Annual report. In addition, there have been no changes to our critical accounting policies identified in our 2019 Annual Report.
ITEM
3. QUANTITATIVE ANDQUALITATIVEDISCLOSURES ABOUT MARKET RISK
COMMODITY PRICE RISK
Our primary exposure to market risk arises from changes in the prices of eggs, corn and soybean meal, which are commodities subject to significant price fluctuations due to market conditions that are largely beyond our control. We are focused on growing our specialty shell egg business because the selling prices of specialty shell eggs are generally not as volatile as non-specialty shell egg prices. The following table outlines the impact of price changes for corn and soybean meal on feed cost per dozen:
Feed
ingredient
Approximate change in feed ingredient cost
Approximate impact on feed costs per dozen
Approximate dollar impact on farm production cost for the 2019 fiscal year
Corn
$0.28 change in the average market price per bushel
$
0.01
$
8,767,050
Soybean
Meal
$27 change in the average market price per ton
$
0.01
$
8,767,050
We generally do not enter into long-term contracts to purchase corn and soybean meal or hedge against increases in the price of corn and soybean meal.
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on an evaluation of our disclosure controls and procedures conducted by our Chief Executive Officer and Chief Financial Officer, together with other financial officers, such officers concluded that our disclosure controls and procedures were effective as of November 30, 2019 at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended November 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Refer to the discussion of certain legal proceedings involving the Company and/or its subsidiaries in our Quarterly Report on Form 10-Q for the period ended August 31, 2019, under Part II, Item 1: Legal Proceedings, and Part I Item 1, Notes to Condensed Consolidated Financial Statements, Note 11: Commitment and Contingencies; and to our Annual Report on Form 10-K for the year ended
June 1, 2019, Part I Item 3: Legal Proceedings, and Part II Item 8, Notes to Consolidated Financial Statements and Supplementary Data, Note 12: Contingencies, which discussions are incorporated herein by reference.
ITEM 1A. RISKFACTORS
Our business and results of operations are subject to numerous risks and uncertainties, many of which are beyond our control. The following risk factors update and refine previously disclosed risk factors from our Annual Report on Form 10-K for the
fiscal year ended June 1, 2019. Our risk factors may materially affect our business, financial condition or results of operations. They should be considered carefully, in addition to the information set forth elsewhere in this Form 10-Q and the Annual Report on Form 10-K for the fiscal year ended June 1, 2019, including under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in making any investment decisions with respect to our securities. Additional risks or uncertainties that are not currently known to us, that we currently deem to be immaterial or that could apply to any company could also materially adversely affect our business, financial condition or results of operations.
Pressure from animal rights groups regarding the treatment
of animals may subject us to additional costs to conform our practices to comply with developing standards or subject us to marketing costs to defend challenges to our current practices and protect our image with our customers. In particular, changes in customer preferences and new legislation have accelerated an increase in demand for cage-free eggs, which increases uncertainty in our business and increases our costs.
We and many of our customers face pressure from animal rights groups, such as People for the Ethical Treatment of Animals and the Humane Society of the United States, to require all companies that supply food products to operate their business in a manner that treats animals in conformity with certain standards developed or approved by these animal rights groups. The standards change over time, but typically require minimum cage space for hens, among other requirements, and some
of these groups have had successful legislative efforts to ban any form of caged
housing in various states. In addition, in recent years, many large restaurant chains, food service companies and grocery chains, including our largest customers, announced goals to transition to a cage-free egg supply chain by specified future dates.
Several states have now passed minimum space and/or cage-free requirements for hens. For example, California passed Proposition 12 in November 2018, which provides for minimum space requirements per hen beginning in 2020 and mandates all eggs or egg products sold
in California must be cage-free by 2022. Subsequently, Washington and Oregon have passed laws requiring cage-free hen housing by 2024. Massachusetts, Rhode Island and Michigan have passed laws establishing minimum space requirements for hens, which are being phased in over time. These laws affect sourcing, production and pricing of eggs (both conventional as well as specialty eggs) not only within these states but also in other areas of the country.
In response to the increase in demand for cage-free eggs, we have increased capital expenditures to expand or convert our existing facilities based on a timeline designed to meet our customers’ current and anticipated needs. In addition, the ongoing production of cage-free eggs is more costly than the production of conventional eggs. Changing our infrastructure and operating procedures to conform to the new customer demands and new laws has resulted
and will continue to result in additional costs, including capital and operating cost increases. We may not be able to pass on these costs to our customers. Our customers typically do not commit to long-term purchases of specific quantities or type of eggs with us, and as a result, we cannot predict with any certainty which types of eggs they will require us to supply in future periods. Accordingly, we may over-estimate future demand for cage-free eggs, which could increase our costs unnecessarily, or we may under-estimate future demand for cage free eggs, which could harm us competitively. We are also enhancing our focus on cage-free capacity when considering acquisition opportunities, as discussed in more detail below.
Our growth strategy subjects us to various risks.
We plan to continue to pursue a growth strategy
that includes acquisitions of other companies engaged in the production and sale of shell eggs. We consider many factors when evaluating an acquisition opportunity, including location relevant to our existing and potential customers, market share, and any costs we deem necessary to improve production at the acquired facilities and integrate them into our operations. We intend to continue to expand through selective acquisitions while monitoring the market demand for cage-free eggs and expending capital resources necessary to construct and convert farms to cage-free when necessary to meet our customers' needs and timeline.
Acquisitions require capital resources and can divert management’s attention from our existing business. Acquisitions also entail an inherent risk that we could become subject to contingent or other liabilities, including liabilities arising from events or conduct prior to our
acquisition of a business that were unknown to us at the time of acquisition. We could incur significantly greater expenditures in integrating an acquired business than we anticipated at the time of its purchase. We may over-estimate or under-estimate the demand for cage-free eggs, which could cause our acquisition strategy to be less-than-optimal for our future growth and profitability.
We cannot assure you that we:
• will identify suitable acquisition candidates;
• can consummate acquisitions on acceptable terms;
• can successfully integrate an acquired business into our operations; or
• can successfully manage the operations of an acquired business.
No
assurance can be given that companies we acquire in the future will contribute positively to our results of operations or financial condition. In addition, federal antitrust laws require regulatory approval of acquisitions that exceed certain threshold levels of significance.
The consideration we pay in connection with any acquisition affects our financial results. If we pay cash, we could be required to use a portion of our available cash to consummate the acquisition. To the extent we issue shares of our Common Stock, existing stockholders may be diluted. In addition, acquisitions may result in the incurrence of debt.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table is a summary of our second quarter 2020 share repurchases:
Total
Number of
Maximum Number
Shares Purchased
of Shares that
Total Number
Average
as Part of Publicly
May Yet Be
of
Shares
Price Paid
Announced Plans
Purchased Under the
Period
Purchased (1)
per Share
Or Programs
Plans or Programs
09/01/19 to 09/28/19
223
$
44.09
—
—
09/29/19
to 10/26/19
—
—
—
—
10/27/19 to 11/30/19
—
—
—
—
223
$
44.09
—
—
(1)
As permitted under our 2012 Omnibus Long-term Incentive Plan, these shares were withheld by us to satisfy tax withholding obligations for employees in connection with the vesting of restricted common stock.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
