CAL-MAINE FOODS, INC. 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 the COVID-19 pandemic, 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 and Current Reports on Form 8-K, (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, (vi) risks relating to the evolving COVID-19 pandemic, and (vii) 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. OVERVIEWCal-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 toMay 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 inthe United States ("U.S."). We market the majority of our shell eggs in the southwestern, southeastern, mid-western, and mid-Atlantic regions of theU.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. 19 -------------------------------------------------------------------------------- Index 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") in the current fiscal year 2020 ranged from a low of$0.64 in July to a high of$3.18 as ofMarch 27, 2020 . 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, particularlyThanksgiving , 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 third quarter, the average UB southeastern large index price was down 13.8% compared with the prior-year period. At the same time our net average selling price for all shell eggs for the thirteen weeks endedFebruary 29, 2020 was down 10.0% to$1.236 compared to$1.373 for the corresponding period of fiscal 2019. During the third quarter and year-to-date periods endedFebruary 29, 2020 , an oversupply of eggs negatively affected the price of non-specialty eggs and demand for specialty eggs was negatively impacted by the low non-specialty egg prices. However, hen numbers, as reported by the USDA Chickens and Eggs report onMarch 23, 2020 , were 330.0 million, which is 11.8 million less hens than reported a year ago. TheUSDA also reported that hatch rates decreased 4.95 percent for the last three consecutive months throughFebruary 2020 , including a 8.0 percent decrease in February, as compared to the same period in the prior year. Since the end of the third quarter, market prices have moved significantly higher to record levels, and we expect to see continued price volatility through the end of our fiscal year. SinceJanuary 2020 , the coronavirus (COVID-19) outbreak, characterized as a pandemic by theWorld Health Organization onMarch 11, 2020 , has caused significant disruptions in international andU.S. economies and markets, intensifying in recent weeks. Since the beginning of our 2020 fourth fiscal quarter, demand for eggs and egg prices have risen as consumers purchased more eggs in anticipation of preparing more meals at home and related to consumer response to the pandemic. We discuss the pandemic and potential future implications of the pandemic in this report; however, the pandemic is an evolving and challenging situation and its impact on our business in the future is uncertain. We are one of the largest producers and marketers of value-added specialty shell eggs in theU.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 inNovember 2018 , which provides for minimum space requirements per hen beginning in 2020 and mandates all eggs or egg products sold inCalifornia must be cage-free by 2022. Subsequently,Washington andOregon have passed laws requiring cage-free hen housing by 2024, andMassachusetts ,Rhode Island andMichigan have similar laws defining space requirements or other restrictions on cages. These states represent approximately 21.1% of theU.S. total population according to theU.S. Census Bureau . 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 20 -------------------------------------------------------------------------------- Index 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. OnMarch 29, 2019 , our Board of Directors approved a major expansion of the cage-free capacity at the Company'sDelta, 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 andFebruary 29, 2020 andMarch 2, 2019 , we produced approximately 88% and 82% of the total number of shell eggs we sold, respectively. 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 compared to 10% in the same period in the prior year. We own the shell eggs produced under these arrangements. Our cost of production is materially affected by feed costs. Feed costs averaged 55.7% and 56.8% of our total farm egg production cost for the thirteen weeks endedFebruary 29, 2020 andMarch 2, 2019 , 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 theU.S. and foreign governments. According toUSDA reports, current supplies of corn and soybeans are favorable heading into the 2020 planting season, and we believe we will continue to have an adequate supply of both grains. However, current ongoing uncertainties and supply chain disruptions related to the COVID-19 outbreak and geopolitical issues surrounding trade agreements and international tariffs could create more price volatility in the future. Looking ahead into the fourth quarter of fiscal 2020 and fiscal 2021, we believe we are taking all reasonable precautions in the management of our operations in response to the outbreak of COVID-19. To date,Cal-Maine Foods facilities are operating normally, and we have not experienced any supply chain or delivery disruptions. Our top priority is the health and safety of our employees, who work hard every day to produce eggs for our customers. As part of the nation's food supply, we work in a critical infrastructure industry, and we have a special responsibility to maintain our normal work schedule. As such, we are in daily communications with our managers across our operations and continue to closely monitor the situation in the communities where we live and work. We are following published guidelines by theCenters for Disease Control (CDC ) and other government health agencies in implementing procedures to protect our employees, and we have strict sanitation protocols and biosecurity measures in place throughout our operations with restricted access to visitors. All non-essential corporate travel has been suspended. Fortunately, there are no known indications that COVID-19 affects hens or can be transferred through the food supply, and we remain focused on meeting the current high demand for eggs. 21
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IndexRESULTS 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.
13 Weeks Ended 39 Weeks Ended
February 29,
2020 March 2, 2019 February 29, 2020 March 2, 2019
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 85.6 % 78.5 % 93.5 % 80.6 %
Gross profit 14.4 % 21.5 % 6.5 % 19.4 %
Selling, general and administrative 12.8 % 11.7 % 14.7 % 12.4 %
(Gain) loss on disposal of fixed assets 0.1 % (0.2) % 0.1 % (0.1) %
Operating income (loss) 1.5 % 10.0 % (8.3) % 7.1 %
Total other income, net 3.7 % 4.0 % 1.9 % 2.1 %
Income (loss) before income taxes and
noncontrolling interest 5.2 % 14.0 % (6.4) % 9.2 %
Income tax (benefit) expense 1.2 % 3.5 % (1.7) % 2.2 %
Net income (loss) before noncontrolling
interest 4.0 % 10.5 % (4.7) % 7.0 %
Less: Income (loss) attributable to
noncontrolling interest - % - % - % 0.1 %
Net income (loss) attributable to Cal-Maine
Foods, Inc. 4.0 % 10.5 % (4.7) % 6.9 %
NET SALES
Net sales for the thirteen weeks ended February 29, 2020 were $345.6 million , a
decrease of $38.4 million , or 10.0%, compared to net sales of $384.0 million for
the thirteen weeks ended March 2, 2019 . The decrease was primarily due to a
10.0% decrease in egg selling prices. The net average selling price per dozen of
shell eggs was $1.236 for the thirteen weeks ended February 29, 2020 , compared
to $1.373 for the thirteen weeks ended March 2, 2019 . The 10.0% decrease in
average selling price accounted for a $37.2 million decrease in net sales.
Net shell egg sales of $336.4 million and $374.5 million made up approximately
97.3% and 97.5% of net sales for the thirteen weeks ended February 29, 2020 and
March 2, 2019 , respectively. Dozens sold for the thirteen weeks ended February
29, 2020 were 271.3 million, a 0.2% decrease from 271.8 million dozen for the
same period of fiscal 2019. The total volume decrease for the thirteen weeks
ended February 29, 2020 accounted for a $653 thousand decrease in net sales.
22
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Index
During the second quarter of fiscal 2020, we lost a portion of our of
non-specialty eggs sales 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. For the third quarter of fiscal 2020,
the volume decreased by 4.8 percent of total shell egg dozens and 6.4 percent of
non-specialty shell egg dozens due to the loss of the business. 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.
The recent acquisition of Mahard had a positive impact on our non-specialty
shell egg volumes and continued growth of our customer base. For the third
quarter of fiscal year 2020, the volume of total shell egg dozens increased by
4.5 percent and the volume of non-specialty shell egg dozens increased by 5.9
percent due to the acquisition. 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.
Egg products accounted for 2.7% and 2.5% of net sales for the thirteen weeks
ended February 29, 2020 and March 2, 2019 , respectively. These revenues were
$9.2 million for the thirteen weeks ended February 29, 2020 , compared to
$9.5 million for the thirteen weeks ended March 2, 2019 , primarily due to lower
prices.
Net sales for the thirty-nine weeks ended February 29, 2020 were $898.3 million ,
a decrease of $182.3 million , or 16.9%, compared to net sales of
$1,080.6 million for the thirty-nine weeks ended March 2, 2019 . The decrease was
primarily due to a 16.8% decrease in egg selling prices. The net average selling
price per dozen of shell eggs was $1.107 for the thirty-nine weeks ended
February 29, 2020 , compared to $1.331 for the thirty-nine weeks ended March 2,
2019 . The 16.8% decrease in average selling price accounted for a $175.6 million
decrease in net sales.
Net shell egg sales of $874.1 million and $1,048.0 million made up approximately
97.3% and 97.0% of net sales for the thirty-nine weeks ended February 29, 2020
and March 2, 2019 , respectively. Dozens sold for the thirty-nine weeks ended
February 29, 2020 were 786.7 million, a 0.3% increase from 784.1 million dozen
for the same period of fiscal 2020. The volume increase accounted for a
$2.9 million increase in net sales.
Egg products accounted for 2.7% and 3.0% of net sales for the thirty-nine weeks
ended February 29, 2020 and March 2, 2019 , respectively. These revenues were
$24.2 million for the thirty-nine weeks ended February 29, 2020 , compared to
$32.7 million for the thirty-nine weeks ended March 2, 2019 , primarily due to
lower prices.
23
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IndexThe 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.
13 Weeks Ended 39 Weeks Ended
February 29, 2020 March 2, 2019 February 29, 2020 March 2, 2019
Total net sales $ 345,588 $ 383,992 $ 898,276 $ 1,080,616
Non-specialty 210,329 62.5 % 234,960 62.7 % 518,898 59.4 % 659,446 62.9 %
Specialty 117,672 35.0 % 131,120 35.0 % 332,092 38.0 % 364,222 34.8 %
Co-pack specialty 7,347 2.2 % 7,052 1.9 % 20,026 2.3 % 20,055 1.9 %
Egg sales, net 335,348 99.7 % 373,132 99.6 % 871,016 99.7 % 1,043,723 99.6 %
Other 1,028 0.3 % 1,340 0.4 % 3,050 0.3 % 4,237 0.4 %
Net shell egg sales $ 336,376 100.0 % $ 374,472 100.0 % $ 874,066 100.0 % $ 1,047,960 100.0 %
Net shell egg sales as
a percent of total net
sales 97.3 % 97.5 % 97.3 % 97.0 %
Dozens sold:
Non-specialty 205,307 75.7 % 201,179 74.0 % 599,788 76.2 % 585,741 74.7 %
Specialty 62,355 23.0 % 67,093 24.7 % 176,982 22.5 % 188,224 24.0 %
Co-pack specialty 3,615 1.3 % 3,533 1.3 % 9,957 1.3 % 10,163 1.3 %
Total dozens sold 271,277 100.0 % 271,805 100.0 % 786,727 100.0 % 784,128 100.0 %
Net average selling
price per dozen:
Non-specialty $ 1.024 $ 1.168 $ 0.865 $ 1.126
Specialty $ 1.887 $ 1.954 $ 1.876 $ 1.935
All shell eggs $ 1.236 $ 1.373 $ 1.107 $ 1.331
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
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
the thirteen weeks ended February 29, 2020 and March 2, 2019 , non-specialty egg
dozens sold increased 2.1% and the average selling price decreased 12.3% to
$1.024 from $1.168 . Comparing the thirty-nine weeks ended February 29, 2020 and
March 2, 2019 , non-specialty shell egg dozens sold increased 2.4% and the
average selling price decreased 23.2% to $0.865 from $1.126 .
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 February 29, 2020 and March 2, 2019 , specialty shell egg
dozens sold decreased 7.1%, and the average selling price decreased 3.4% to
$1.887 from $1.954 . For the thirty-nine weeks ended February 29, 2020 , specialty
shell egg dozens sold decreased 6.0% and the average selling price decreased
3.0% to $1.876 from $1.935 compared to the same period of fiscal 2019. In both
the third quarter and year-to-date fiscal 2020 periods, specialty egg volumes
were affected by the significant price differential between non-specialty and
specialty eggs.
24
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Index
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 February 29, 2020 and March 2, 2019 were 3.6
million and 3.5 million dozen, respectively, which represented 1.3% of total
dozens sold for those periods. Co-pack specialty shell eggs sold during the
thirty-nine weeks ended February 29, 2020 and March 2, 2019 were 10.0 million
and 10.2 million dozen, respectively, which represented 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 third quarter of fiscal 2020, egg product sales were $9.2 million , a
decrease of $308 thousand , or 3.2%, compared to $9.5 million for the same period
of fiscal 2019. Pounds sold for the thirteen weeks ended February 29, 2020 were
17.8 million, an increase of 3.2 million, or 21.5%, compared to the same period
of fiscal 2019. The selling price per pound for the thirteen weeks ended
February 29, 2020 was $0.517 compared to $0.650 for the same period of fiscal
2019, a decrease of $0.133 or 20.5%.
For the thirty-nine weeks ended February 29, 2020 , egg product sales were $24.2
million , a decrease of $8.4 million , or 25.9%, compared to $32.7 million for the
same period of fiscal 2019. Pounds sold for the thirty-nine weeks ended February
29, 2020 were 51.1 million, an increase of 5.9 million, or 13.1%, compared to
the same period of fiscal 2019. The selling price per pound for the thirty-nine
weeks ended February 29, 2020 was $0.474 compared to $0.725 for the same period
of fiscal 2019, a decrease of $0.251 or 34.6%.
25
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IndexCOST OF SALES
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).
?
?
?
?
13 Weeks Ended 39 Weeks Ended
February 29, February 29, Percent
2020 March 2, 2019 Percent Change 2020 March 2, 2019 Change
Cost of Sales:
Farm production $ 172,525 $ 162,595 6.1 % $ 499,840 $ 473,655 5.5 %
Processing, packaging, and
warehouse 60,186 57,126 5.4 % 170,998 167,181 2.3 %
Egg purchases and other
(including change in inventory) 56,179 74,295 (24.4) % 146,754 205,096 (28.4) %
Total shell eggs 288,890 294,016 (1.7) % 817,592 845,932 (3.4) %
Egg products 6,870 7,443 (7.7) % 19,687 23,881 (17.6) %
Other - 92 (100.0) % 2,919 698 318.0 %
Total $ 295,760 $ 301,551 (1.9) % $ 840,198 $ 870,511 (3.5) %
Farm production cost (per dozen
produced)
Feed $ 0.406 $ 0.421 (3.6) % $ 0.411 $ 0.416 (1.2) %
Other $ 0.323 $ 0.320 0.9 % $ 0.328 $ 0.316 3.8 %
Total $ 0.729 $ 0.741 (1.6) % $ 0.739 $ 0.732 1.0 %
Outside egg purchases (average
cost per dozen) $ 1.23 $ 1.30 (5.4) % $ 1.12 $ 1.31 (14.5) %
Dozen produced 239,072 222,213 7.6 % 684,837 654,380 4.7 %
Dozen sold 271,278 271,805 (0.2) % 786,728 784,128 0.3 %
Cost of sales for the third quarter of fiscal 2020 was $295.8 million , a
decrease of $5.8 million , or 1.9%, from $301.6 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 February 29, 2020
was $172.5 million , compared to $162.6 million for the comparable period of
fiscal 2019, an increase of $9.9 million , which is primarily due to an increase
in production volume and an accelerated amortization expense associated with
selling flocks early due to market conditions. Dozens produced increased by 7.6%
compared to the same period of fiscal 2019. Feed cost per dozen for the thirteen
weeks ended February 29, 2020 , was $0.406 , compared to $0.421 per dozen for the
comparable period of fiscal 2019, a decrease of 3.6%. Other farm production cost
per dozen produced increased 0.9% to $0.323 for the thirteen weeks ended
February 29, 2020 , compared to $0.320 for the same period of last year.
26
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Index
Cost of sales for the thirty-nine weeks ended February 29, 2020 was $840.2
million , a decrease of $30.3 million , or 3.5%, from $870.5 million for the same
period of fiscal 2019. This decrease was primarily driven by the decrease in
both volume and a 15% decrease in the cost of outside egg purchases. Farm
production costs for the thirty-nine weeks ended February 29, 2020 was $499.8
million , compared to $473.7 million for the comparable period of fiscal 2019, an
increase of $26.2 million , which is primarily due to increased production volume
and an accelerated amortization expense associated with selling flocks early due
to market conditions, and higher labor costs. Dozens produced increased by 4.7%
compared to the same period of fiscal 2019. Feed cost per dozen for the
thirty-nine weeks ended February 29, 2020 , was $0.411 , compared to $0.416 per
dozen for the comparable period of fiscal 2019, a decrease of 1.2%. Other farm
production cost per dozen produced increased 3.8% to $0.328 for the thirty-nine
weeks ended February 29, 2020 , compared to $0.316 for the same period of last
year.
Included in cost of sales for the thirty-nine weeks ended February 29, 2020 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 third quarter of fiscal 2020 was $49.8 million compared to
$82.4 million for the same period of fiscal 2019. For the thirty-nine weeks
ended February 29, 2020 , gross profit decreased to $58.1 million from $210.1
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
reflected the unfavorable supply and demand balance during the periods.
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).
13 Weeks Ended
February 29, 2020 March 2, 2019 $ Change % Change
Specialty egg expense $ 12,581 $ 14,218 $ (1,637) (11.5) %
Delivery expense 13,309 13,442 (133) (1.0) %
Payroll, taxes and benefits 10,639 10,674 (35) (0.3) %
Stock compensation expense 886 866 20 2.3 %
Other expenses 6,816 5,809 1,007 17.3 %
Total $ 44,231 $ 45,009 $ (778) (1.7) %
For the thirteen weeks ended February 29, 2020 , selling, general, and
administrative expense was $44.2 million compared to $45.0 million for the
thirteen weeks ended March 2, 2019 . Specialty egg expense decreased $1.6
million , or 11.5%, compared to the same period of the prior year. Specialty egg
expense typically fluctuates with specialty egg dozens sold, which decreased
7.1% for the thirteen weeks ended February 29, 2020 .
Other expenses increased
27
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Index
39 Weeks Ended
February 29, 2020 March 2, 2019 $ Change % Change
Specialty egg expense $ 35,995 $ 40,973 $ (4,978) (12.1) %
Delivery expense 39,341 40,145 (804) (2.0) %
Payroll, taxes and benefits 31,391 31,695 (304) (1.0) %
Stock compensation expense 2,680 2,620 60 2.3 %
Other expenses 23,027 19,317 3,710 19.2 %
Total $ 132,434 $ 134,750 $ (2,316) (1.7) %
For the thirty-nine weeks ended February 29, 2020 , selling, general, and
administrative expense was $132.4 million compared to $134.8 million for the
thirty-nine weeks ended March 2, 2019 . Specialty egg expense decreased $5.0
million , or 12.1%, compared to the same period of the prior year. Specialty egg
expense typically fluctuates with specialty egg dozens sold, which decreased
6.0% for the thirty-nine weeks ended February 29, 2020 . Advertising expense,
which is a component of specialty egg expense, also contributed to the decrease
in specialty egg expense for the thirty-nine weeks ended February 29, 2020 .
Other expenses increased
OPERATING INCOME (LOSS)
For the thirteen weeks ended
For the thirty-nine weeks endedFebruary 29, 2020 , we recorded an operating loss of$74.8 million compared to an operating income of$76.2 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 unconsolidated entities, and patronage income, among other items.
For the thirteen weeks endedFebruary 29, 2020 , we earned$880 thousand of interest income compared to$2.1 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$77 thousand and$115 thousand for the thirteen weeks endedFebruary 29, 2020 andMarch 2, 2019 , respectively. For the thirty-nine weeks endedFebruary 29, 2020 , we earned$3.9 million of interest income compared to$5.8 million for the same period of fiscal 2019. The decrease resulted from significantly lower investment balances, partially offset by higher interest rates. The Company recorded interest expense of$258 thousand and$358 thousand for the thirty-nine weeks endedFebruary 29, 2020 andMarch 2, 2019 , respectively. Patronage dividends, which represent distributions from our membership inEggland's Best, Inc. were$10.1 million for the thirteen and thirty-nine weeks endedFebruary 29, 2020 and$10.5 million for the same periods in the prior year. Patronage dividends are paid once a year based on profits of Eggland's best as well as their available cash. 28 -------------------------------------------------------------------------------- Index Equity in income of unconsolidated entities for the thirteen weeks endedFebruary 29, 2020 was income of$1.4 million compared to income of$2.1 million for the same period of fiscal 2019. The decrease of$666,000 is primarily due to the decrease in egg selling prices impacting the profitability of our joint ventures.
Equity in income of unconsolidated entities for the thirty-nine weeks ended
Other, net for the thirteen weeks ended
Other, net for the thirty-nine weeks endedFebruary 29, 2020 , was income of$1.9 million compared to income$372 thousand for the same period of fiscal 2019, primarily driven by realized and unrealized gains in equity securities.
INCOME TAXES
For the thirteen weeks endedFebruary 29, 2020 , pre-tax income was$18.0 million compared to$53.5 million pre-tax income for the same period of fiscal 2019. For thirteen weeks endedFebruary 29, 2020 , income tax expense of$4.3 million was recorded with an effective tax rate of 23.7%, compared to income tax expense of$13.6 million for the comparable period of fiscal 2019, which reflects an effective tax rate of 25.5%. For the thirty-nine weeks endedFebruary 29, 2020 , pre-tax loss was$57.5 million compared to$98.7 million pre-tax income for the same period of fiscal 2019. For thirty-nine weeks endedFebruary 29, 2020 , income tax benefit of$15.4 million was recorded, with an effective tax rate of 26.7%, compared to income tax expense of$24.1 million for the comparable period of fiscal 2019, which reflects an effective tax rate of 24.4%.
At
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.
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
For the thirteen weeks ended
For the thirty-nine weeks ended
NET INCOME (LOSS) ATTRIBUTABLE TO CAL-
Net income for the thirteen weeks endedFebruary 29, 2020 was$13.7 million , or$0.28 per basic and diluted share, compared to net income of$39.8 million , or$0.82 per basic and diluted share for the same period of last fiscal year. Net loss for the thirty-nine weeks endedFebruary 29, 2020 was$42.1 million , or$0.87 per basic and diluted share, compared to net income of$74.0 million , or$1.53 per basic and$1.52 per diluted share for the same period of last fiscal year. 29
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IndexCAPITAL RESOURCES AND LIQUIDITY
Our working capital atFebruary 29, 2020 was$355.7 million , compared to$492.8 million atJune 1, 2019 . The calculation of working capital is defined as current assets less current liabilities. Our current ratio was 4.97 atFebruary 29, 2020 , compared with 7.58 atJune 1, 2019 . During the second quarter of fiscal 2020, we retired all outstanding long-term debt. As such there is no long-term debt atFebruary 29, 2020 , compared to$1.5 million atJune 1, 2019 . OnJuly 10, 2018 , we entered into a$100.0 million Senior Secured Revolving Credit Facility ("the Revolving Credit Facility"). As ofFebruary 29, 2020 , 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 ourJune 1, 2019 audited financial statements for further information regarding our long-term debt. For the thirty-nine weeks endedFebruary 29, 2020 ,$36.5 million in net cash was used in operating activities, compared to$94.6 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 the large increase in trade receivable balances. For the thirty-nine weeks endedFebruary 29, 2020 ,$181.5 million was provided from the sale and maturity of investment securities compared to$160.2 million for the thirty-nine weeks endedMarch 2, 2019 . We used$12.1 million and$122.2 million to purchase investment securities for the thirty-nine weeks endedFebruary 29, 2020 andMarch 2, 2019 , respectively. The net decrease in investment securities funded negative cash flows from operations as well as ongoing construction projects and the acquisition of Mahard. We did not invest additional resources in our unconsolidated entities during the thirty-nine weeks endedFebruary 29, 2020 compared to$4.3 million for the same period fiscal 2019. We continue to invest in our facilities as$94.6 million was used to purchase property, plant and equipment for the thirty-nine weeks endedFebruary 29, 2020 compared to$36.8 million in the thirty-nine weeks endedMarch 2, 2019 . 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 ofFeatherland Egg Farm, Inc. in the second quarter of fiscal 2019. We received$6.1 million in distributions from unconsolidated entities during the thirty-nine weeks endedFebruary 29, 2020 compared to$6.5 million for the same period fiscal 2019. We used$1.6 million for principal payments on long-term debt and finance leases compared to$3.0 million for the same period of fiscal 2019. We did not pay any dividends during thirty-nine weeks endedFebruary 29, 2020 compared to$28.5 million for the same period of last fiscal year.
As of
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 thatFred 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 30 -------------------------------------------------------------------------------- Index 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$344 million in facilities, equipment and related operations to expand our cage-free production starting with our first facility in 2008. The following table represents current material construction projects approved as ofFebruary 29, 2020 (in thousands): Spent as of February Remaining Projected Project(s) Type Projected Completion Projected Cost 29, 2020 Cost Cage-Free Pullet Houses Fiscal 2020 6,331 3,150 3,181 Convertible/Cage-Free Layer Houses & Pullet Houses Fiscal 2021 31,701 17,457 14,244 Cage-Free Layer & Pullet Houses/Processing Facility Fiscal 2022 87,204 28,793 58,411$ 125,236 $ 49,400$ 75,836
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
InJune 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 afterDecember 15, 2019 , our fiscal 2021. Early adoption is permitted for annual reporting periods and interim periods within those annual reporting periods beginning afterDecember 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. InJanuary 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 afterDecember 15, 2019 , our fiscal 2021. Early adoption is permitted for annual or interim goodwill impairment tests performed on testing dates afterJanuary 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. InAugust 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 afterDecember 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
31
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Index
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 do not expect the adoption of this
guidance to have a material impact on our 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 endedJune 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.
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